The main sources of demand for oil across the globe include consumers and industrial users as indicated by Pirog (2005). As a result, the intensity of the demand changes in line with the changes in theGDP, and commensurate to the business cycles.
Unlike any other commodity, the supply of oil is managed by a global body, OPEC, which has been in operation since 1960. Its control is exerted through the quota system, which, in addition to political instability and other psychological processes associated with the market place, is the main source of the volatility in oil prices. Shocks in the price levels of oil are capable of propagating a recession in the macro-economy of the importing economies as indicated by Roubini & Setser (2004). Increases in oil prices are capable of slowing down the progress in production and precipitating an economy-wide rise in price leading to inflation. Unlike any other type of price increases, the benefits from the price hikes normally benefit the oil producers and not the economy in which the prices have gone up.
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