The Macroeconomic Effects of Increase in Imported Crude Oil Prices

Abstract

Since the Second World War (WWII), oil has become one of the most significant sources of energy (Brini & Jemmali & Farroukh, 2016: 1). Therefore, economists have been closely interested in the empirical evidence that the increase in import crude oil prices may be related to macroeconomic performance. In other words, this interest goes back to the 1970s, when import rates of oil were too high, unprecedented deterioration in international oil markets was seen and the US had a weak macroeconomic performance. Thus, these experiences in the 1970s played an important role in discussing the relationship between imported crude oil prices and macroeconomics. Then the collapse of oil prices in 1986, the 1990-1991 Gulf War, the explosion of oil prices in 2000, and the 2003 Invasion of Iraq increased the significance of this issue (Barsky & Kilian, 2004: 115). It has been estimated that oil reserves, one of the most important raw materials that are widely used in today's economy and which cannot be renewed, will run out in the late 21st century (Yetkiner & Berk, 2008: 1). Products which prominently feature oil are common in transportation, energy production and production of chemical goods. For this reason, oil price is one of the key prices in the international economy and is widely used as a reference value for other energy sources (Korhonen & Ledyaeva, 2008: 5). Oil prices are among the most significant factors which affect the economic performance of the world and individual countries since every sector in the economy is directly or indirectly connected to oil, which is one of the main energy sources. Therefore, the higher the price of imported crude oil and the longer it lasts, the greater the impact on macroeconomics. In addition, as the share of oil spending in an individual country increase in GDP, and the country's ability to access alternative sources of energy other than oil decreases, the negative impact of imported crude oil prices on the economy increases. Macroeconomists have defined changes in oil prices as a major paradox for global shock which can be both a major source of economic volatility and can simultaneously affect most economies (Amin et al., 2015: 2). In this context, many researchers intensively discuss the relationship between oil prices and macroeconomic fluctuations. As oil prices are constantly changing, they have a significant effect on macroeconomic variables such as inflation and output (Wang & Carlos, 2017: 2). Therefore, the effect of change in the price of imported crude oil, which constitutes the most important source of energy for meeting rising demand on economic indicators as a result of technological development and population growth rate should be examined well (Abdioğlu & Değirmenci, 2016: 331). On the other hand, many researchers argue that the negative effects of increases in imported crude oil prices on the economy may be stronger than the positive effects of the decrease in oil prices on the economy (Ben et al., 2016: 138). In this context, the relationship between the increase in imported crude oil prices and macroeconomics has aroused the interest of researchers and policy makers, especially in the last four decades (Abdulkareem & Abdulhakeem, 2016: 1). In this study, the effects of imported crude oil prices on macroeconomics have been researched. In this direction, firstly, the definition of oil and the characteristics of the oil market have been addressed and the macroeconomic effects of increase in imported crude oil prices have been discussed.