Impact of oil prices

Many a times over the last couple of years, I noticed the crude oil prices being given a lot importance when talking about the economy. What is evident is that the increase in oil prices drives the fuel prices up at the gas pump for consumers. Therefore, reducing the money available to spend. But I wondered whether this was the only impact to the economy. It turns out that there are more.

When consumers see such a sudden increase in the gas prices, a supply shock, then they sense an economic calamity coming and tighten their spending further. For an economy such as US, in which consumer spending is a large portion of the GDP, the effects are compounded.

The prices of lot of goods, produced and ready to purchase, depend on the oil directly and/or indirectly. In some cases directly because oil is used in the manufacturing prices. Indirectly, when the goods or produce need to be transported. The result is inflation -- the prices of the produce and the good increases. The increase in prices cause the consumers to cut back on the discretionary spending. The demand for goods goes down, which results in job losses. Thus, an increase in unemployment. This is called stagflation -- an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.