As postulated by McDonald, et al. (2005), theMiddle Eastis an important player in the energy sector of the world. Most of the oil consumed in the world originates from theMiddle Eastowing to the huge reserves of oil in the region. Most of the economies in the region are built on resources originating from the huge oil reserves in the region.
Actually, some of the countries in the region rely solely on oil in the running of the government, with others having migrated to other economic activities to supplement the returns from oil. The demand for oil as a source of energy is high. On a global scale, oil remains the most versatile form of energy with most automobiles and engine-run machines consuming oil on a perpetual basis. Changes on oil prices either due to changes in demand or supply have far reaching implications on the ability of countries and organizations to achieve production efficiency, thereby affecting the productivity of an economy at large.
According to Kilian (2008), the price of oil forms part of the prices that affect the spending habits of households. However, owing to the nature of the energy products, this element of expenditure has the most significant impact of the households, more than any other form of expenditure. Economists and policy makers are thus concerned about changes in energy prices owing to the overall effects on the economic outlook of the households in an economy. This originates from the fact that the price changes of energy products change without commensurate changes in other products and the fact that the demand for energy products is inelastic. As a result, regardless of the changes in price of energy products, both consumers and producers in an economy will have to bear with the situation, with minimal changes in the demand.
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