Oil Demand Grows as Economy Grows

A developing economy has its own fair share of energy requirements, most of which are met through oil. The larger the economy grows, the more will be its requirement for crude and other energy sources. The Covid-19 pandemic highlighted the fact pretty well.

Crude oil prices briefly traded below $0 in April 2020, when the Covid-19 pandemic had paused economies globally. Less transport, almost zero manufacturing activities, and halted construction plunged the demand for oil at that time. But since then, oil prices have increased sharply, as countries across the world double down on their efforts to offset the pandemic’s impact with a renewed focus on economic activities. 
Rising Oil Prices Fuel Inflation

A major revision in oil prices leads to a change in the price of several commodities that directly or indirectly require petroleum products to hit the markets. Both wholesale and retail inflation picks up the pace when global oil rates are on the boil. According to experts, a rise of $10/barrel in crude oil prices could potentially lead to an increase in inflation by 10 basis points or 0.1%.

The shipping and transport industry is a case in point. Rising fuel prices will force shipping and transport companies to increase the rates for their services. The rising costs are finally passed to the end consumers, which are left with no option but to buy goods at exorbitant rates.

Maciej Kolaczkowski, Manager Oil and Gas Industry – Energy, Materials, Infrastructure Platform, World Economic Forum Geneva, explains that if oil accounts for 3% of GDP, buying the crude for twice as expensive tomorrow will obviously impact inflation. He further suggests that while oil prices do play a role in inflation, it’s loose monetary policies that lead to untamable inflation in a nation.

For instance, governments could offer subsidies on petrol selling at retail points. In this case, customers won’t notice rising fuel prices while refilling the gas tank, but will eventually end up paying more for other goods and services.

Oil prices in the past few weeks have surged to more than $100 a barrel in the backdrop of Russia’s attack on Ukraine. The rising oil prices have yet again shown the world how important it is, as global economies search for cheaper deals to fuel their nation’s growth. India and China are picking up cheap Russian crude. Whereas, Western countries, which are said to be discouraging their oil purchases from Russia, are reportedly using the exceptions and exclusions in the sanctions so that they can continue using the Russian crude – a step signifying how crucial oil is for their economies to be up and running.

For countries already in economic distress, it’s a double whammy. For instance, Sri Lanka, which is on the verge of the brink of bankruptcy, increased diesel and petrol prices by SLR 75 per liter and SLR 50 per liter, respectively, in a single day to offset the rising costs of the fuel.

Other nations too are finding ways to deal with an unprecedented rise in crude oil prices. In the current scenario, the question is – How do oil prices impact the global economy? – becomes all the more relevant.

In a bid to provide our readers with a brief on why the world revolves around oil, why crude plays such a pivotal role, and how its shortage can play havoc; here we have listed a few major reasons: