Effect of oil prices on global economy

High oil prices result in inflation, increased input cost, reduced non oil demand and lower investment in net oil exporting countries. All this results in fall in revenue and increased budget deficit. With increase in inflation the interest rates increase because lenders demand high interest to compensate decrease in purchasing power.

Oil price increase also affects position of balance of trade between counteries and exchange rates. Net-oil importing countries experience deteriorating balance of payments and downward pressure on currency. As a result imports become more expensive. Although Governments cannot eleminate these effects it can minimise it with proper monetary measures.