My article appeared in The Nation magazine in December of 2015 and is entitled “The Oil Price Plunge.” I selected this article in order to better understand the macroeconomic effects that oil shocks may have (“The Oil Price Plunge” 5). This article defines the two major ways oil price movements can affect the macro economy. One common explanation holds that oil price increases can inhibit GDP growth by raising production costs. Alternatively, big oil price changes (either in the form of increases or decreases) may adversely affect output by causing a delay in business investment because of raising uncertainty.
More specifically, this article explains the two dominant economic views about oil shocks. One view holds that oil shocks have symmetric effects, and another view holds that oil shocks have asymmetric effects. A symmetric effect explanation holds that an increase (decrease) in oil prices reduces (increases) future GDP growth. Now, if the effect is asymmetric, the situation may be more complex. Asymmetric effects introduce other channels into the equation for how GDP growth is effected. In particular, a big change in oil price (decrease or increase) may affect the macroeconomic environment in at least two ways. Firstly, by raising uncertainty about future prices, it delays investment. Second, it influences the reallocation of resources, to sectors less adversely affected. This article explains the economic theory of price oil shocks in light of consequences for world politics. As prices have shifted downward, strategic responses have changed. Europe is buying less oil on average because of an economic slump and decrease in demand. In the past, the world's largest oil producer which is Saudi Arabia, has simply decreased production in order to prop up prices. (“The Oil Price Plunge” 5) This is not an efficient response in today's climate, however. The United States now has been flooding the market with its own crude production from its shale formations (“The Oil Price Plunge” 5-6). For countries that depend on oil revenue to finance the entirety of its operations, the slump in oil prices will play out seriously over the coming months in the political spectrum.
Works Cited
Walstad, William B., and Robert C. Bingham. McConnell and Brue Macroeconomics. McGraw-Hill College, 2014.
“The Oil Price Plunge” The Nation 23 December 2015. Print.
