Thursday, July 3, 2008

Effects of oil price increase on world trade/globalization

Oil is conquering new heights every day. With 145 dollars a barrel, it is the single largest commodity affecting world economy today. Does its effect confines to an increase in inflation across nations? No. Oil has a much larger impact, especially when it comes to international trade; in a globalized world.

One of the fundamental principles that propelled globalization was a world without boundaries; a world that was seamlessly linked. When we narrow this down, being seamless attributes to low international transportation costs which allowed nations to trade (buy and sell goods) with each other and still have a cost advantage.

The transportation costs were so much low so that there was an incentive to import goods from any corner of the world in spite of the distance it has to be shipped and sell it for less than what is available locally. On the other hand, it also allowed nations to export goods to other countries and sell it for less than the price out there, due to marginal transportation costs. Thus transportation costs had a major hand in the success of globalization.

The increase in oil price has disrupted this pillar of globalization. Transportation costs are increasing world wide due to fuel price increase and it might increase to such a extent that it may not become economically plausible for a country to buy or sell goods outside. The transportation costs may become the deciding factor of the final price of goods and hence would account for an obvious collapse of the cost advantage that nations enjoyed previously.

Thus the oil price increase has a strong impact on the global economy and to globalization. Let’s hope that economies world over would think over it and do something to put an end to growing oil prices.

Inspired by ‘The rebirth of distance’ – Niranjan Rajadhyaksha
Image courtesy: Getty Images

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