What is Oil’s Impact on Global Economies

I n today’s day and age, having the power of the internet allows us to stay informed and updated with most global phenomena. The countries that own oil rigs and the countries that have the oil are both equally important players when it comes to oil’s impact on global economies. The industry of oil and natural gas in the US supports approximately 8% of the GDP and accounts for almost 10.3 million jobs. So, how exactly does something like oil play such a huge monopoly?

Why the Price of Oil Impacts the Price of Everything Else

One of the primary reasons that most global superpowers want a hold on the oil production and distribution sector is that the price of oil directly affects the price of practically everything else. How you may ask? This is because every good you consume, whether it is tangible or intangible, has either been transported using oil or runs on electricity using the energy generated by oil.

Imports and exports heavily rely on oil, whether they are shipped by sea, by air, or by land. The fuel consumption of these crafts is primarily oil, which adds to the cost of producing a certain good. For a raw material to reach a factory, it needs to be transported from the field to the factory. For the finished product to reach the market, it needs to be transported from the factory to the market. Both the production and the distribution of goods are reliant on the use of oil.

Besides that, a large majority of the chemicals used in manufacturing are made of oil, or derived from oil. As such, if the price of oil increases, the cost of production increases, therefore the price of the product increases. The same is true if the price of oil decreases. The cost of production drops and therefore the price of the product drops. Sometimes, if the price of oil decreases, the price of the product remains the same, while the profit margin for the production sector increases.

The Oil Industry and Employment

Another strong tie between the oil industry and the global economy is the number of jobs created. The exploration and production of oil is a lengthy process that requires a lot of manual and skilled labor, thereby opening up positions for people to work. Drilling crews, loader operators, truck drivers, diesel mechanics, and many other professions are created largely due to the oil industry.

This creates a domino effect of the oil industry helping surrounding sectors such as the hospitality industry (hotels, motels, inns) and car dealerships, to name a few. Most drilling sites are away from the city and barely have any shops nearby, so the restaurants and other shops that open also increase employment and growth.

If the oil industry faces layoffs, a lot of people lose jobs, and not just the ones who were directly affected. Surrounding industries no longer have customers to serve and therefore often close down due to decreased traffic and profit.

Oil and the Growth of Economies

The banking and investment sector is also heavily impacted by the increase or decrease in the prices of oil. The investment sector is directly related to the economy, by which relation if there is a loss, the economy suffers too. Most company operations are financed through raising capital, and this happens when debt is taken on.

Despite bankers and investors being well-versed in the risk involved, they can sometimes still face huge losses. This does not mean that their risk calculation was incorrect, it simply means that they took a bigger risk than they could afford to. If the prices of oil decrease, investors often face losses and their capital is usually almost destroyed. In turn, this affects the overall growth of the economy.

The Risk of Being Tied Directly to Oil

For the countries whose economies rely either largely or solely on oil production and distribution, the impact is much more severe. If there is an increase in price, it is obviously beneficial to them, but if there is a decrease in prices, their economies take a big hit.

As such, it is important for a country’s economy to be diverse. The American economy, for example, does not solely rely on oil. It is quite diverse, and as such the U.S. economy can deal with price fluctuations in a better way than the rest of the world. This does not mean that the impact isn’t felt, it just means that it is easier to cope with it.

Now that you are aware of oil’s impact on global economies, you should be aware of how important the oil industry is to the growth of a certain country.