Relationship between oil price rise and the recession in modern world Essay

Relationship between oil price rise and the recession in modern world economy - Essay Example This paper is one of the best examples of analysis of the quantitative relationship between oil prices and economic recession. Conceptual framework advocated by different economists were evaluated and three models for understanding the impact of oil price fluctuations were assessed. These models, despite differing approaches, converge to the same conclusions. For this study the AS/AD model has been chosen in preference to those developed by Mankiw and Blanchard and Sheen. The present situation of change in oil prices was assessed and there is an attempt in the paper to predict what the sharp increase in oil prices is likely to lead to for the major economies of the world. Increases in oil prices have been held responsible for recessions, periods of excessive inflation, reduced productivity and lower economic growth in the past. As the development rates of the world economy reach all time highs the recession that another oil price hike may cause will be difficult to control by traditional methods, since simultaneously interest rates are already very low and further tightening of money supply would yield very marginal results. While the demand for oil has risen, this is primarily due the push by emerging economies like China and India, the dependence of the economy on oil has reduced considerably with the strengthening of the IT and services sectors. It is concluded that the rise in oil prices will definitely result in an across the board change in prices and thus inflation rates will continue to be high.