Impact of Business Cycles and Oil Prices on Oil Importing and Exporting Countries

Different phases of a business cycle in an economy have a direct effect on the prices of oil and thereby affecting the economies’ of oil importing and exporting countries. A business cycle in an economy has five different phases including expansion, peak, recession, trough and the recovery phases. During an expansion, phase leads to the high productivity of oil, and thus countries exporting oil increases the amounts of oil exported to various countries. This in turns boosts the economies of such countries due to the boom in the oil business. Moreover, during the expansion period, the demand for oil products increases and thus leading to an increase in the supply of oil. However, the price fluctuations have no significant effect on the economies of some oil exporting countries due to the diversification of industries within those countries. However, in countries that solely rely on the exportation of the oil business, business cycles might lead to fluctuations in oil prices and therefore have adverse effects on the economies of the countries (Filis, 2010).

In the contraction period, the demand for oil products decreases and thereby leading to a decrease in the prices of oil products. The economies of oil exporting countries during this period are exposed to multiple risks leading to slow growth in the economy due to reduced revenues (Sodeyfi & Katircioglu, 2016). On the other hand, the economies of the oil importing countries witness a gradual growth due to the decreasing prices of oil products, and thus the excess funds are used in investment purposes within the countries. Therefore, an increase in the prices of oil decreases the GDP of oil importing countries whereas a decrease in the oil prices in the GDP of such counties. Besides, the economies of oil importing countries are not sensitive to fluctuations in oil prices as compared to the economies of oil exporting countries. In some instances, excessive supply of oil might lead to inflation within an economy and thus halting the growth of the economies as the prices of oil fall below the regular rates (Cavallo & Ribba, 2018). The chart below shows the effect business cycle and oil prices have on importing and exporting countries.

(Sodeyfi & Katircioglu, 2016)

References

Cavallo, A., & Ribba, A. (2018). Measuring the effects of oil price and Euro-area shocks on CEECs business cycles. Journal of Policy Modeling, 40(1), 74-96.

Filis, G. (2010). Macro economy, stock market and oil prices: do meaningful relationships exist among their cyclical fluctuations?. Energy Economics, 32(4), 877-886.

Sodeyfi, S., & Katircioglu, S. (2016). Interactions between business conditions, economic growth and crude oil prices. Economic Research-Ekonomska Istraživanja, 29(1), 980-990.