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Oil has been described as the “life blood” of society. It is what makes the cars go “vroom” and the manufacturing plants go “clank”. Yet oil appears to be rising in price so fast that people are becoming frightened about its potential side effects on their daily lives. The feelings of fear are strong and overpowering and still have a ring of truth; even if they are over exaggerated. Currently oil prices are hovering $56.00 per barrel but it wasn’t but a few months ago that they hovered around $76.00 per barrel. These higher prices have to affect the economy in some way but few of us know exactly how. The effects have a chain reaction that dwindles down to even the most basic of necessities that average Americans enjoy. 1. Higher oil prices slow the economy. When oil is expensive it costs more to conduct business in the United States through transportation, oil based supplies (i.e. rubber), utilities and even increased interest rates. This high price cause products to cost more and in turn means that fewer products are being sold or exported and less people are being hired due to the down turn in manufacturing. The total GNP typically declines by .01 % for any $10 increase per barrel in the $40-$80 range. 2. When oil prices are high consumer goods cost more, utilities are more expensive and people travel less. This has an overall affect on business and in turn the amount of people who are being hired for jobs. Over time it can become a vicious cycle where people don’t have money to spend. 3. The government and private investors begin to look for alternative ideas on fuel. People begin to turn down their heat, take fewer trips and conserve the energy they have. Companies begin to investing in alternative energy sources such as wind, solar and bio-fuels. 4. Plants and manufacturing companies adjust their product lines to reflect the need of consumers to conserve their energy. Thus ideas like more efficient light bulbs and hybrid cars begin to make their way onto the market. 5. As America develops their own alternative energy sources, as energy is conserved through cutting back and new products the demand for oil decreases. Because the United States and soon to be China are the largest consumers of oil the supply of oil rises thereby reducing prices. The cheaper price causes the pressure for newer innovations to subside. At the end of the cycle America is in a slightly stronger position than it was just a short time before. Each new period of high oil prices brings about a subsequent adaptation by the American market thus strengthening the overall all independence of the country. Thus when oil prices rise, countries like Saudi Arabia and Venezuela increase output in order to maximize profit and dissuade the country from adapting. Murad Ali is a two-time author, human resource professional, entrepreneur, and a Ph.D. candidate. For more great articles visit http://thenewbusinessworld.blogspot.com
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