Economic remedy hinges on oil prices, political will

Evolution of oil prices 1987-2011 (average Bre...

Evolution of oil prices 1987-2011 (average Brent spot prices – adjusted for U.S. inflation). (Photo credit: Wikipedia)


By  Dr Shahzad Latif 


One of the major causes of the current global economic slump is higher price of the crude oil. Oil prices have doubled over the past five years.


Gas (petrol) is proportionally a high cost production factor in millions of different products and also is used to bring the product to the consumer, affecting the final cost significantly.


Currently, a major portion of disposable income is being expended towards buying gas (petrol), and buying other high-priced necessities, mainly because the oil prices have soared so high.


During this time of global contraction, where incomes of people are considerably down this continuing oil prices trend is a major worry.


Even governments are forced to not promulgate job-creating fiscal policies. Poor and developing countries particularly are at the rough end of the stick.


The trend gives rise to fears that the world will spiral into stagflation where the prices will continue to rise while economies will become stagnant. Let us take United States as an example, where recent reports show increase in unemployment while it desperately needs to have an improved labor market.


Higher inflation reduces the net worth of people causing even further reduction in economic activity as psychology comes into play.


At this stage of supposed recovery, the US economy should be growing at the least rate of 3.5 to 4% but recently revised numbers show it hovering around 2%.  Several economists argue if the situation does not improve fast enough, the US economy might go into a double dip recession. This is also true with majority of economies around the globe including the fast-growing economies like China and Brazil.


Though demand for petrol and petroleum products have doubled, the production cost of these have remained virtually unchanged.


The  only beneficiaries of this global scenario appear to be  the group of oil producing and exporting countries and oil companies while people are being pushed into a vicious economic cycle.


A crucial remedial step towards boosting the global economy could be for the OPEC  to voluntarily increase oil production to an equilibrium where prices subside to a level of prices in 2005.


This global issue needs to be addressed rather swiftly. In absence of some quick measures, the world will continue to face double dip prospects.


Another factor that could help the world in these tense times could be the role of major political players of the world towards resolution of longstanding disputes. The world powers should try to work out solutions in a peaceful manner but outside the media limelight. That would reduce the chances of an excuse for oil companies to artificially increase prices.


The mix of economic downturns and festering political problems are hanging like a double-edged sword on peace prospects and economic recovery.

A sustainable way out of trouble demands a long-term thinking based on the action that  tackles the issue of oil prices expertly and concurrently addresses political disputes deftly. The world needs inclusive reforms on both counts.

Shahzad Latif is  a Chicago-based political economist.

Views expressed by experts in the Opinion section are entirely their own and do not necessarily reflect editorial policy of MyGlobalCommunityToday.

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1 reply

  1. Agree with Dr. Latif and I believe we need to focus on this aspect which he mentioned: Higher inflation reduces the net worth of people causing even further reduction in economic activity as psychology comes into play.

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