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Jeremy

Oil Prices Effects on World Trade

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The oil prices have been highly fluctuating. How does this affect global trading?

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Hi Jeremy,

The oil prices rose to an unprecedented high when the global crisis hit the world economy in 2008. 2020 has seen oil prices take a sharp decline since the measures to curb the Covid-19 pandemic took effect. While these fluctuations in oil prices are difficult to control, they play a role in economic changes, causing various consequences on world trade.
As the oil prices keep changing, the terms of trades also change. The low oil price is perceived to result in economic development, while high oil cost is associated with inflation, unemployment, and low economic growth.
That way, if oil price shoots, the oil-importing nations suffers from the high cost of importing the product while the oil-exporting nations get a boost in the national earnings through export income. The impacts, however, gets more pronounced when the change in oil price last longer.
A drop in oil price, like in 2020, is good news for world trade because businesses incur lower operation and shipment costs. That way, the oil-importing countries, and their fuel-intensive companies experience a boom in business.
High oil prices increase the production cost of businesses (such as heating, manufacturing, and transportation). With the increased production cost, businesses can pass the costs to consumers, making products and services less affordable. In general, it leads to inflation, which stagnates world trade and economic growth.  
High oil prices can also affect the demand and supply of none oil commodities. It can reduce supply by making production too expensive such that businesses can only create a few products.  However, while the oil price still plays a role in world trade and the world economy at large, there's evidence that the economy's effects have reduced over time. Thanks to the increase in energy efficiency, improvement of monetary policy, and flexibility in labor markets.
 

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