Economics Project Of Oil

ECONOMICS

NATIONAL UNIVERSITY OF MODERN LANGUAGE. LAHORE CAMPUS

ECONOMIC S OIL PRICE EFFECT ON WORLD ECONOMICS

presented by; Ahmad Qadri

Usman MBA-2

night Numl student

Iqbal Numl student

Ahmad Tahir

Asad MBA-2 night

Awais

Numl student

MBA-2 night

SHUMAIR

IJAZ Numl student

MBA-2 night

Fahran Nasir numl student

Mba-2 Night

Presented to; Miss Fatima This Project is Dedicated to my Beloved Father

& Mother,families,our

friends And all the teachers how teach me … Qadri

--Usman Ahmad

Asad Iqbal Awais Ahmad Tahir FAHRAN NASIR

TABLE OF CONTENT

ShUMAIR Ijaz

1.

Introduction…………………………………………… (1)

2.

History…………………………………………………... (3) i. Truman doctrine…………………………………………………………………… (3)

ii. Expropriation vs economic warfare 1950……………………………………… (3)

iii. Suez(post war petroleum order)……………………………………………… iv. v. vi. vii. viii.

3.

(4) Opec(organization of the petroleum exporting countries)………………… (5) End of 1960 to early 1970………………………………………………………… (6) 1973 Yom kippur War……………………………………………………………... (6) 1973 Oil crisis ……………………………………………………………………… (6) Desert Storm…………………………………………………………………......... (8)

Current oil price impact on Transition economy….(9) i. In 2000-2007………………………………………………………………………… ii.

4.

….(9) In 2008 to upward……………………………………………………………………. (12)

Oil price impact on different countries………… …..(17)

i. Oil price Impact on Pakistan Economy………………………………………….. ii. iii.

(18) Current situation……………………………………………………………………... (18) How Pakistan is coping with the challenge of High oil prices?.....................(19)

5. Analysis of the Impact of high oil price Impact on Global economy………………………… …..(24) i. Oil price shocks and the Economy 1. 2. 3. 4.

oil price shocks affect economic activity purchasing power effects sensitive is GDP to oil price shocks Economy relationship symmetric

Twenty Surprising ways High oil price affects the Global economy…………………………………… ……(25) 6.

Conclusion………………………………………………….(

1)-Introduction

Crude Oil: Is the raw, unprocessed, liquid form that comes out of the ground. It is also known as petroleum. Crude oil is a fossil fuel, meaning that it was made naturally from decaying plants and animals living millions of years ago Crude oils vary in color, from clear to tar-black, and in viscosity, from water to almost solid.

Fuel: Any substance (liquid, solid or gas) that releases its stored heat energy and turns it into actual heat and motion energy, when treated in a certain way such as by burning or by combustion in an engine. When the fuel is burned it is destroyed and leaves us with carbon emissions. Fuel prices: Typically displayed in either Price Per Liter (Litre) in the UK, Europe, Australia, New Zealand and South Africa and Price Per Gallon in the US and Canada. Fuel economy: Also known as Fuel Efficiency can be best described as ways to drive carefully, smoother and effeciently to get achieve more miles per gallon. Petrol: Also known as Gasoline refined from Crude oil and is approx. 15% lighter in density than petroluem diesel. A mixture of various hydrocarbons used as a fuel.

Oil resources in the different part of world:

2)-

HISTORY

2.1)-March 12, 1947 Truman Doctrine: • New Aramco: Socol, Standard Oil of NJ, Texaco, Socony • Gulf Oil – Shell in Kuwait. • Iranian contract between Anglo Iranian and Standard Oil, • Socony.

2.2)-Expropriation vs. economic warfare, 1950: • No oil export no money, economic trouble • U.S. and Brithish assisted coup • The shah regained power 

Oil consortium: Jersey, Socony, Texaco, Standard of California, Gulf; Shell; CFP;

Anglo Iranian.

Result: The economic is trouble because they have no trend export of oil in the world.

2.3)-Suez: • Suez represented the post-war petroleum order: • 2/3 of Europe’s oil passed through Suez • 2/3 of traffic in Suez was oil

2.4)-OPEC: (Organization of the Petroleum Exporting Countries)

• End of 1950s: Soviet Union is the second largest oil producer: • Oil companies cut prices

OPEC’s aim: • • •

Building national refineries. National integrated oil companies. Stabilize market for themselves, 60-40 % share.

2.4.1)-Founding of OPEC: The Organization of the Petroleum Exporting Countries (OPEC) consisted of thirteen countries, including Iran, seven Arab

countries, plus Ecuador Indonesia Nigeria Angolaand Venezuela. OPEC had been formed on September 14, 1960 at the Baghdad conference. It was made to protest pressure by major oil companies (mostly owned by U.S., British, and Dutch nationals) to reduce oil prices and payments to producers. At first it had operated as an informal bargaining unit for the sale of oil by Third World nations. It confined its activities to gaining a larger share of the revenues produced by Western oil companies and greater control over the levels of production. However, in the early 1970s it began to exert its strength.

2.5)-End of 1960s, early 1970s: Recession in US and British power:

Demand in oil was catching up with supply – end of surplus. Huge economic growth fueled by oil. • US oil production: 11.3 million barrels per day, the peak • More dependency on Middle Eastern oil. • •

2.6)-1973 Yom Kippur war: • • • •

The Soviet Union supported Egypt and Syria. The USA supported Israel. World War conflict was imminent. Oil exporters increased oil prices 100%.

•

Arabs cut oil supply and eventually stopped exporting to USA. A weak president in the yom kippur war contributed to the oil crisis. •

2.7)-1973 oil crisis: • •

•

• • • •

•

•

January 1973—The 1973–1974 stock market crash begins. August 23 1973—In preparation for the Yom Kippur War, Saudi King Faisal and Egyptian president Anwar Sadat meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the "oil weapon" as part of the upcoming military conflict[8]. September 15—The Organization of Petroleum Exporting Countries (OPEC) declares a negotiating front, consisting of the 6 Persian Gulf State, to pressure for price increases and an end to support of Israel, based on the 1971 Tehran agreement. October 6—Egypt and Syria attack Israel on Yom Kippur, starting the fourth Arab-Israeli War October 8–October 10—OPEC negotiations with oil companies to revise the 1971 Tehran price agreement fail. October 12— The United States initiates Operation Nickel Grass, an overt strategic airlift operation to provide weapons and supplies to Israel during the Yom Kippur War. October 16—Saudi Arabia, Iraq, Abu Dhabi, Kuwait, and Qatar unilaterally raise posted prices by 17% to $3.65 per barrel and announce production cuts. October 17—OPEC oil ministers agree to use oil as a weapon to punish the West for its support of Israel in the Arab-Israeli war. They recommend an embargo against unfriendly states and mandate a cut in exports. October 19—US President Richard Nixon requests Congress to appropriate $2.2billion in emergency aid to Israel, including $1.5 billion in out-right grants.[9] Saudi Arabia,

• • • •

• •

• •

•

•

Libya and other Arab states proclaim an embargo on oil exports to the United States. October 23–October 28—The Arab oil embargo is extended to the Netherlands. November 5—Arab producers announce a 25% output cut. A further 5% cut is threatened. November 23—The Arab embargo is extended to Portugal, Rhodesia, and south africa. November 27—U.S. President Richard Nixon signs the Emergency Petroleum Allocation Act authorizing price, production, allocation and marketing controls. December 9—Arab oil ministers agree to another five percent cut for non-friendly countries for January 1974. December 25—Arab oil ministers cancel the five percent output cut for January. Saudi oil minister Yamani promises a ten percent OPEC production rise. January 7–January 9, 1974—OPEC decides to freeze prices until April 1. February 11—United States Secretary of State Henry Kissinger unveils the Project Independence plan to make U.S. energy independent. February 12–February 14—Progress in Arab-Israeli disengagement brings discussion of oil strategy among the heads of state of Algeria, Egypt, Syria and Saudi Arabia. March 17—Arab oil ministers, with the exception of Libya, announce the end of the embargo against the United States.  December 1974—The 1973–1974 stock market crash ends.

2.8)-Desert Storm:

• August 2, 1990: Iraqi invasion of Kuwait • New oil shock, supply decreased • Loss had been compensated by December from other sources • January 17, 1991: Desert Storm • February 28 cease fire Desert storm

3)-Current OIL PRICE IMPACT ON TRANSITION ECONOMIES:

3.1)-IN 2000 – 2007: • The price of oil affects just about everything that is made, transported, eaten and sold in the United States. But with oil approaching $100 a barrel, the impact on the U.S. economy has been less than many analysts expected. • Time and again, economists from Alan Greenspan on down have warned that higher oil prices are inflationary. They make it more expensive to drive, to buy an airplane ticket and to manufacture anything from air conditioners to zippers. • Despite that, the economy grew at an annual rate of 4.9 percent last quarter. That's been a surprise to Jay Bender, president of a South Dakota injection-molding company. NPR interviewed him in January 2003 when oil sold for $32 a barrel. At the time he worried that rising oil prices would make raw materials more expensive. • "That's going to be a challenge and if it does squeeze our bottom line too hard, it will have an impact on our ability to invest in capital equipment and grow our business," Bender said in 2003. • Today, he says, the cost of raw materials has increased, but "I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] … is when these costs go up they impact my competitors as well."

• So, how is his company doing now? • "We're doing well," he said. "I would say it's the same scenario as three or four years ago that our sales are continuing to increase, our top line is good, we just set a sales record in August and we broke it again last month in October." • Bender said he has survived because by becoming more efficient, fighting back against higher prices and passing on some increases to customers. • Economist Ken Goldstein of The Conference Board, which compiles the Consumer Confidence Index, said what's happened to Bender is happening across the economy. He said it may not look like it when you see all those SUVs but the U.S. is more energy efficient than it used to be and alternative fuels are more widely available. • "When oil gets much more expensive … some biofuels," become more cost effective, Goldstein said. "We are able to make that switch today. We weren't able to make that earlier." • Federal Reserve Governor Alice Rivlin said there is another reason the economy has survived price increases — less manufacturing. • "We don't depend on energy as much because we don't depend on manufacturing as much," Rivlin said. "Services are less energy intensive." • Goldstein believes the days of relatively painless price increases are ending. A lot of things are getting more expensive. • "For example, the price of some of these sports drinks hadn't increased in seven years. It did this summer and precisely because the price of transporting that stuff by

truck to the supermarket to the grocery store got more expensive to the point where they had to go for a price increase," he said.

• Goldstein says there is always a lag between the time when oil goes up and the time its impact is felt in the economy. • "This $100 — near $100 — a barrel crude oil, that's still on the tanker," he said. "That hasn't even gotten to the refinery, let alone to the gas station on the corner." • When it does, he said, gasoline could hit $4 a gallon. • That's bound to be felt by consumers. Whether they stop spending will depend partly on other factors, such as how well the housing industry and the job market do. But the past few years have shown that the economy can adjust to rising prices better than people once thought.

$/bbl $80 $70 Financial Markets Discover Commodity Investing

$60 $50 Saddam gets mad

$40 $30

King Fahd gets mad Tanker war

$20 $10

OPEC market share strategy: a bad idea

Everyone gets mad

Iraq-Iran war ends

Exxon Valdez

Warm winter

OPEC agreement

Iraq war

Nigerian Disruptions

Chinese Demand

Fund buying 9/11 Threat of Iraq embargo Asian recession

$0 1985

1987

3.2)-IN

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2008:

CURRENT ISSUES ABOUT THE OIL PRICE: I. Retail gasoline prices fell to a national average of

$2.22 a gallon, dragged down by the falling price of crude, which now costs 60 percent less per barrel than it did in mid-July. II. Light, sweet crude for December delivery fell more

than 5 percent, or $3.25, to $59.16 a barrel on the

New York Mercantile Exchange. In earlier electronic trading, crude fell to $58.32, it's lowest point since March 2007. III. Oil prices fell two days ahead of a report from the

International Energy Agency, which some analysts expect will cut its 2009 oil demand forecast for the third consecutive month. IV. Volatile price swings are occurring almost every day

on the trading floor. V. While the Nymex contract is now trading near first-

half 2007 prices, the difference then between daily highs and lows was around $1.50 a barrel, while now the average daily range is around $5.50 a barrel with recent daily peaks at $9.50, said analyst Olivier Jakob of Petromatrix in Switzerland. VI. Investors have grown increasingly leery about the

swooning U.S. economy, which faces its worst recession in decades. VII. Industry analysts had expected China and India

would continue buying crude if the U.S. and other western nations went into recession, but the booming economies of Asia have begun to show signs of fatigue. VIII. Some forecasts had called for China's gross domestic product to grow 10 percent next year. More recent

forecasts have it closer to 6 percent, the firm Cameron Hanover said in a report Tuesday. IX. A $586 billion stimulous package in China boosted markets globally early Monday, but those gains fizzled quickly and a sell-off that began by midday in the U.S. continued in Asia and Europe Tuesday. X. On Tuesday, the Dow sank more than 200 points after Homebuilder Toll Brothers Inc. and Starbucks Corp. gave investors more evidence the housing market and consumer spending are getting weaker. XI. Toll Brothers said fourth-quarter revenue fell 41 percent from the year-ago period, while Starbucks reported lower sales across the coffee chain, leading to profits that fell below analysts' expectations. XII. Gasoline fell again overnight, dipping 2 cents to a national average of $2.22 for a gallon of regular unleaded, according to auto club AAA, the Oil Price Information Service and Wright Express. The average price has fallen nearly 32 percent in the past month and, according to AAA, could be headed to $2 a gallon nationally by year's end. XIII. Crude demand from the U.S., the world's largest consumer of energy, is a key driver of oil prices. XIV. "We saw extremely poor car sales and pretty shocking unemployment numbers from the U.S. last week," said Toby Hassall, an analyst with Commodity Warrants Australia in Sydney. "It wouldn't surprise me if oil edged down toward $50."

XV. U.S. car sales fell to a 25-year low in October while the unemployment rate shot to a 14-year high of 6.5 percent last month. XVI. Oil prices fell despite signs that OPEC members are going ahead with production cuts agreed to at an emergency meeting in Vienna, Austria, last month. XVII. Many analysts are expecting another cut by the Organization of Petroleum Exporting Countries, which will meet on Dec. 17 in Oran, Algeria. XVIII. The prime minister of Qatar said Tuesday that "fair" oil prices of between $70 to $90 per barrel would ensure that expensive oil exploration could continue, avoiding price spikes in the future. XIX. Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while oil prices below $70 a barrel may seem like a gift to consumers, it could trigger price spikes in the near future when demand picks up. XX. But for now it is waning energy demand, not the supply controlled by OPEC, that is dominating crude prices.

XXI. Events that earlier this year threatened to cut off supply in oil producing nations no longer appear to have the power to send prices surging. XXII. Militants in Nigeria on Monday resumed attacks on the country's oil installations. The military said it killed eight people while guarding a facility in the oil-rich south of the country. XXIII. Militants frequently attack oil facilities, seeking to hobble Africa's biggest petroleum industry and force Nigeria's federal government to send more oil funds to the southern states where the crude is pumped.

XXIV. "The focus of the market has really been on the demand side," Hassall said. "I'd be surprised if supply side issues in Nigeria could change the mood of the market." XXV. In other Nymex trading, heating oil futures fell 7.48 cents to $1.93 a gallon, while gasoline prices dropped 7.3 cents to $1.2945 a gallon. Natural gas for December delivery tumbled 39.8 cents to $6.85 per 1,000 cubic feet. XXVI. In London, December Brent crude tumbled 6 percent, or $3.54 to $55.54 a barrel on the ICE Futures exchange.

4)-OIL PRICE IMPACT ON DIFFERENT COUNTRIES :

4.1)-OIL PRICE IMPACT ON PAKISTAN ECONOMY: 4.1.1)-CURRENT SITUATION: • On month-on-month basis, Pakistan’s oil import bill rose to 1.406 billion dollars during August 2008 from 995.7 million dollars in the corresponding month of last year, witnessing surge in oil import prices both in Arabian Light Crude and frequently hike in crude oil prices in western countries during the period under review. • Given domestic shortages and emerging political concerns for strategic reserves, the country’s food import bill increased to 252.1 million dollars with an increase of 51.8 million dollars during the second month of current financial year from 200.3 million dollars in August 2007. However, official sources and economic experts are foreseeing that currently with international crude oil trading close to $92 per barrel, 7 months low, Pakistan can save $1-1.5b in oil import bill. This will have a positive impact on current account deficit for the upcoming months of FY09. The country imported $41.869 million worth of wheat, which along with price hikes of palm oil and other products raised the food import bill to $51m during August 2008. • The State Bank of Pakistan reported on Tuesday that in the category of petroleum group, country’s import payments on petroleum products increased to $754.2 million in August 2008 against $355.2 million in August 2007 while country had spent $652 million on the import

of petroleum crude. • It is important to note that in August 2008, petroleum products with petroleum crude and palm oil in food group imports requirements registered a strong growth as compared to slowdown in import growth of these commodities witnessed during last month of FY09 (July 2008). • The total machinery group’s import payments swelled to $452.9 million in the month of August 2008 against 433.1 million in August 2007, showing an increase growth in power generating machinery and textile machinery which surged to $ 76.631 million and 93.196 million respectively during the course of period under review. • In machinery group, mobile phones growth substantially hampered by 21 million dollars to 18.351 million dollars in August 2008 to 39.380 million dollars in August 2007. According to official data on foreign trade, trade deficit of the country had widened by 47.67 percent to 3.522 billion dollars during July-August 2008 from 2.385 billion dollars in July-August 2007 on year-on-year basis amid record acceleration in the import growth caused by inflated petroleum group imports, increased import of wheat and slowdown in export growth. • During August the second month of the current financial year, trade deficit amounted at 1.877.7 billion dollars, showing an increase growth of 14.18 percent against 1.644 billion dollars in the last month of prevalent fiscal (July 2008). During the particular course of past month (August 2008), country witnessed record volume of trade deficit soared by 46.37 percent to $1.877b from $1.282b in the corresponding month of FY08.

4.2)-How Pakistan is coping with the Challenge of High Oil Prices? The trend in rising prices has become a grave concern for the developing economy like Pakistan. Because if this trend continued can result in inflationary pressures in the economy, increasing budget deficit and balance of payment problems and slowdown in the economic growth

4.2.1)- Pakistan Energy Sector Scenario: Energy sector has a direct link with the economic development of a country. In line with the rising growth rate of GDP demand for energy has also grown rapidly. Per capita energy consumption of the country is estimated at 14 million Btu3, the energy consumption has grown at an annual average rate of 4.4 percent from to 2005-08. Although it is only a fraction of other industrialising countries in the region as Thailand and Malaysia. in Pakistan has led to rising crude oil imports from Middle East exporters (Saudi Arab playing the lead role). In addition, limited refining capacity leads to heavy dependence on the imports of petroleum products. According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of petroleum products in the country

is about 16 million tons out of which only 18 % are met through local resources while the balance 82 % is met through imports. Therefore, the international oil price fluctuations have a direct impact on the oil prices in the local market

4.2.2)-Impact of High Oil Prices:

In July 2008 has seen the maximum of $147 per barrel. This rising trend in oil price in the international market has hurt the economies of many countries in the world including that of Pakistan. The extent to which economies hurt as a result of price shock depends on the country’s dependency on oil. Before analysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing the vulnerability of the Pakistan’s economy.

4.2.3)-GDP Growth and Oil prices Increasing oil prices squeeze income and demand. At a given exchange rate, more domestic output is needed to pay for the same volume of oil imports. If the domestic currency depreciates in response to induced payments deficits, this further cuts the purchasing power of domestic income over imported goods. Since important trading partners are also likely to suffer income losses, slower growth of external demand aggravates these direct impacts.

The government has consumed its budgetary target of bank borrowing (Rs. 130 billion) by January 2008, further borrowing from banking or non-banking sources may destabilize the financial health (Khan 2008). It is estimated that utilization of PSDP would remain significantly lower than allocated Rs. 520 billion.

Rapidly growing economies will generally experience more rapid growth of non-oil taxation, and hence be better able to withstand the fiscal impacts of a less than fully passing on of oil price increase. In Pakistan, non-oil taxation is more or less the same for the last few years.

4.2.4)-Oil Prices and Inflation: Another channel via which high oil prices may affect macroeconomic performance is through the high costs of production thus reducing output.

4.2.5)-Balance of Payment Effect: Our petroleum imports account for 24 percent of total imports (and represented up to 44 percent of export earnings) in 2006-07. While, in 1999-2000 the share of petroleum imports was 27 percent of total imports and accounts for 33 percent of total export earnings. Improving terms of trade would mean that a smaller volume of exports would be needed to pay for a given quantity of imports. For Pakistan this ratio however is decreasing, that is more exports are needed to offset the burden of rising import bill.

2004

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2008

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Price Effect

Income Effect

Substitution Effect

Net Demand Change

5)-Analysis of the impact of high oil price on the Global Economy: 5.1)-Oil Price Shocks and the

Economy: 5.1.1)-oil price shocks affect economic activity: • Eight out of ten post WW2 recessions followed by oil price shocks • Statistical evidence links oil prices to inflation, higher interest rates and higher unemployment rates • Consensus: An inverse statistical relationship between oil price changes and economic activity

5.1.2)-Purchasing power effects:

• Oil price increase shifts purchasing power from oilimporting nations to oil-exporting nations • On net, demand for oil importer’s goods reduced • Lower consumption, lower GDP growth, higher saving and lower interest rates

5.1.3)-Sensitive is GDP to oil price shocks: Empirical studies: The economy’s sensitivity to oil price shocks has declined in past decade. • Monetary policy can shape how oil price shock is experienced: slower growth versus higher inflation. • •

5.1.4)-Economy relationship symmetric: • Rising oil prices seem to retard economic activity more than falling oil prices stimulate it. • Possible explanation: more economic adjustment costs and coordination problems with rising oil prices

6)-20 Surprising Ways High Oil Prices Affect the Global Economy: When you think of high oil prices, you’re probably reminded of huge bills at the pump and inflating costs on goods and services. However, the high cost of oil brings on so much more than that.Following some of the lesser-known ways high oil prices affect the global economy.

1.

Less Asian growth: As China and India grow, they rely

heavily on oil, which is part of the reason for the spike in prices. However, they’re shooting themselves in the foot because the higher prices go, the less they can afford, and their growth is slowed. They also use energy less efficiently, so the prices are exacerbated. 2. Bargaining power: With higher oil prices, oil-exporting countries hold the power. This might embolden these nations to become more assertive or demanding of other countries in both political and economic ways. 3. Alternative energy grows: As oil gets more expensive, alternative energy becomes much more attractive. Investment and employment in clean technology goes up right along with high oil prices. 4. European countries are marginally affected: With the dollar declining on the euro, Europeans feel the rising cost of oil much less than others. 5. Bad monetary policy: Rising energy costs are a cause for concern in most households, and governments tend to react to this sort of situation. However, if they react with inappropriate policies, they can make things worse by simply prolonging the inevitable. 6. Exporters hold on to their money: Instead of pumping profits back into the global economy, exporters tend to save them. That means that the global demand will tend to fall. 7. Helps US dollar: Although we’re not seeing this currently, in theory, higher oil prices should support a stronger dollar. This is because oil is priced in dollars, and demand for dollars will increase with higher oil prices and dollardenominated investment from exporters. 8. Other energy exporters flourish: Exporters of non-oil energy like coal and gas flourish as consumers attempt to shift to cheaper energy. 9. New capital shift: As prices are hiked, investors consider putting their money in other sectors, which has a stimulating effect on the economy. 10. China has a cushion: Although as a developing country China is hit harder by oil prices, they seem to have a

cushion as investment moves away from oil, and they maintain a fixed exchange rate with the dollar. 11. The US doesn’t have it so bad: Although your wallet may beg to differ, the United States is not hit as hard as other oil importers because we still produce about 40% of the oil we consume. 12. Government subsidies fail: Some governments subsidize fuel, and higher oil prices put pressure on them. The subsidies interfere with supply and demand, as consumers continue to demand more while prices stay relatively flat. 13. Interest rates go up: As higher oil prices lead to inflation and rigidities in government expenditures, interest rates rise. 14. Oil-producing

countries don’t earn as much as you’d think:

While the dollar suffers, oil exporting countries are subject to reduced purchasing power as they buy goods in euros. 15. International business suffers: When the cost of oil goes up, flights get more expensive and corporate travel costs go up. This leads to less frequent business trips to international locations. 16. The virtual economy flourishes: As the cost of transportation rises, virtual work and net meetings become more popular. 17. The travel sector suffers: Hotels, cruises, airlines, and others in the travel industry are affected negatively by high oil prices because transportation costs are higher, and consumers are spending less because of stress on their budgets. 18. Countries will stop paying bills: At some point, many countries may be forced to choose between oil and international debt repayments. As they default on these loans, they’ll hurt large international finance institutions. 19. Consumers save more: When consumers are faced with rising oil costs, many create precautionary savings just in case things get worse. 20. Consumers buy cars: Although budgets are being squeezed, consumers will buy more cars, presumably to upgrade to a more fuelefficient foreign model.

7)-Conclusion: •

•

The economy experiences some costly adjustment to both rising and falling oil prices • When oil prices rise, slowing economic activity is further retarded by adjustment costs. • When oil prices fall, stimulated economic activity is somewhat offset by adjustment costs We then have asymmetry: rising oil prices retard economic activity by more than falling prices stimulate it.