THE CORKTILES REVIEW

As the economy goes into recession, we are faced with a new dilemma of decreasing incomes and increasing expenditures; most of the people have lost all their savings as a result of the sudden changes in the economic and financial structure in the country. The increasing oil prices have also added to the troubles of average American citizens who are already suffering from uncertainty in employment and the default on their debt/mortgage and lease payments. The changes in crude oil prices is not only limited to petroleum products, it has a wide range effect on the overall economy; in order to understand this simple concept, we need to start from the basics…

Gas price index for the USA

The gas prices domestically are determined by the prices of crude oil internationally; thus when there is a change in crude oil prices, the gas prices in United States also start fluctuating but this effect is not immediate – it takes some time for the shock to hit and affect the economy. In addition to this, a change in the international or domestic supply of oil is not neutralized at once by a change in demand; as a result a gap between the supply and demand is created which causes the prices to rise and the consumer preferences to change. The change in oil prices has a diversified effect on the economy which can be analyzed under two scenarios: firstly there is a direct impact that the consumers face – they are forced to change their spending habits in order to fulfill their gas requirements; along with this, many of them also stop taking their cars out for leisurely trips thus reducing the revenue that the government generates from collection of toll on the roads.

Are we heading back to there?

The indirect effect is more prominent in the long run and it affects the consumers more adversely; as the oil process increase, the cost of factors of production for the industrial sector also increase. Thus they have to produce the same products at a higher cost – they charge this excess cost to their customers in order to save their profits. Hence, the customers suffer from a general wave of inflation in the economy with only a slight increase in oil prices which reduces their purchasing power. So when the gas prices increase, the greatest losers in the economy are the household consumers while the gainers include the government or the industrial sector.

The government can play an important role in regulation of oil prices in the country to save the households from suffering; it can increase the oil exploration programs in the country, so that most of the domestic demand is met by domestic supply. Along with that, it can provide subsidy on oil, so that the entire impact of price hike is not taken by the average American. However, these are only short term solutions, in the long run, effects policy implementation is the only thing that can prove effective against inflation caused by increasing oil process both domestically and internationally.