Sample Essay

The impact of the oil shock depends on a number of factors as discussed hereunder. First the size of the shock measured according to the real price changes and the proportion of the increase. The proportion of the increase could be similar, but the real change is actually large. This depends on the relationship between the original price and the resultant price (The World Bank, 2011). The higher the original price, the larger the real price shocks regardless of the proportion of change. Secondly, it is important to consider the persistence of the price shocks. Persistence of the price shocks is a product of political, economic, social and cultural factors in play at the time. Booming economic conditions in a large importer is bound to indicate an increased supply, thereby making it possible for the oil prices to jump. Prevailing political situation is also capable of accruing significant premiums on the oil owing to the fact that the unpredictability of the future situation generates an additional proportion of demand, normally termed as the ‘fear premium’ (Onuor n.d).

Thirdly, the level of dependence on oil and oil products in the production of goods and services will also influence the impact of the oil shocks. Economies which rely on imports of oil for a large proportion of their production are bound to suffer significantly as compared to those who have reliable domestic supplies of oil. Incase the oil shocks occur, oil importers have no option but bear with the situation.

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