Readers Question: What will happen if OPEC continued to increase oil prices?
Firstly, the rise in the price of oil is not just due to the activities of OPEC. It is partly due to the rising demand from countries such as China.
If OPEC continue to contribute to higher oil prices in 2008 it would have the following effects.
Oil Exporting Countries.
- Higher prices would lead to higher oil revenues. This would improve their current accounts and also government finances.
Oil Importing Countries.
- Would see a deterioration in their current account deficits.
- Inflation. – Higher oil prices is likely to lead to cost push inflation. This is because the price of oil effects the cost of producing many different goods.
- Economic Growth. Economic growth may slowdown if oil prices continue to rise. However, it would have to be a fairly significant rise in prices to have a permanent effect.
- Incentives – Higher oil prices will increase the incentive for firms and consumers to switch to non oil based transport. For example, it would encourage consumption of solar powered cars and hydrogen cars.
- Higher prices for consumers. Demand is inelastic in the short term. But, over time a continued rise in oil prices would start to discourage people making journeys by car. It could also increase demand for other forms of transport like buses and trains
- Environment. If higher oil prices reduced consumption it would make a contribution to reduce carbon emissions. This may help reduce the effects of global warming.
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hmmm… maybe increasing fuel will be a good thing… increased alternatives and unessary journies… and it would incease the incentive to be more efficient for companies 🙂 sounds good to me!
but uh oh inflation and current a/c deficit doesn’t seem that great :O