In addition, monetary and fiscal policies will have an effect on the interest rates of the whole economy.
Higher oil prices affect the global economy in a number of ways. Some of the factors include the transfer; when consumers buy oil, they transfer their wealth to oil producers. In our case, the decrease of oil prices makes the US dollar to be strong and causes repatriation of money to the Federal Reserve.
The forces of demand and supply have affected the global prices. The laws of demand and supply state that as the price of a commodity increases, its demand decrease with the exception of a few while the law of supply states that as the supply of commodities decreases, its price increases. In the international oil prices the law of demand and supply applies. The diagram below demonstrates on the law of demand and supply for crude oil up to 2015.
The supply of oil since last year has been increasing steadily than the actual demand which led to the decrease of oil prices as shown above. The supply was caused by stockpiling of unused oil. The chat above is used courtesy of International Energy Agency. However, in countries like Russia and Venezuela, its bad news. The oil producing and exporting company would not pass a resolution on this trend. Of a great interest is Saudi Arabia which has been blamed for not curbing its production thus leading to a high supply of crude oil and gas in the world. As a result, the prices went down by half which led to their economy to decline unlike in the US which has stored oil in barrels in their reserves.
Another effect is that this causes price discrimination among various states especially the emerging economies. Countries like India and China compared to the US have greater price disparities due to oil prices fluctuation. The US in a way enjoy monopoly because of the strong currency and emerging economies currency continue to depreciate Hanke (2014). This is what causes