The world has been an expanding global village since the idea of science developed as a result, the world economy has been unified. Many will argue that the most important financial sources in the world is the oil because it is a primary source of power .In these modern times these power has became necessity ,so without it the world came to stand still since people could no longer be active .Further more ,countless amount of economic activities would stop without oil. For this reason, oil is one of the most important sources in the world. Therefore looking into how the oil prices affects the world economy and understanding their association will help to understand the flow of economy. Economic growth is generally acknowledged to be the main driver of oil demand and for this reason much attention in the oil business is focused on the state of the world economy. However, what about the impact of changes in the oil price on economic growth? Could oil price movements have a significant effect on the global economy when the oil industry’s value in 2003 amounted to only 4% of global GDP? Is it not a case of the tail wagging the dog? Prior to the first oil price crisis in 1973 global economic growth seemed divorced from variations in the oil price. Since then, the world has experienced three universal economic
Recessions, defined by economists as years when the global economic growth rate was below2.2%. On each occasion the recession was preceded by sharp rises in the price of oil. During the latest recession in 2001, world growth stood at 1.6% following a year (2000) in which the price of oil had increased by 46%. It therefore seems fair to say that large increases in the oil price do affect world economic growth adversely, but how exactly does this happen? A change in the price of oil affects the demand for oil, which is a component of consumption;
Consumption in turn constitutes the largest slice of GDP. Naturally, the larger the oil price change the bigger the negative effect on oil consumption and the larger the final effect of such a change on GDP. However, the full effect of an oil price change on economic growth does feed through straight away. There is a much smaller impact effect that takes place within year and a much larger full-adjustment effect that manifests itself years later. The CGES estimates that the large 33% global oil price increase of 2000 knocked only 0.2
of a percentage point off world GDP growth within that year. However, the negative effect of that increase on global economic growth after thirteen years is much greater, at 1.2 percentages
Points. In very broad brush terms, average global nominal GDP during the period 2012-16will be $2,238bn lower because of the oil price (and US Dollar and world GDP deflator)changes observed during the years 1999-2003, all other things being equal. What happens to the oil price today does matter for the future too.
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