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Recommended: oil prices and economic effects.

According to Chuk, (2012), the transmission mechanisms of oil price shock into the macro economy are three including aggregate demand, aggregate supply as well as the structure of interest rates. In the mechanism of aggregate supply, Morana (2013) realizes that the impact on producers can provide the explanation concerning business cycles from petroleum price shocks and technology. This means that energy price increases result in an imperfect competition structure of the market where the pricing of goods by firms goes beyond the marginal cost. In an imperfectly competitive market structure, energy price shocks would lead to the reduction in capital use leading to the conclusion that in the case that the transmission mechanism of oil into the GDP is through aggregate supply, the effects would be the rise of inflation.
In aggregate demand, Bjørnland (2008) explains the manner in which the increase in oil prices results in the reduction of consumers’ purchasing power thereby reducing expenditures on products and services. In particular, Guidi (2010) indicates that an increase in the oil price has a negative impact on output through the reduced consumption of products that are durable.
In the last place, Ushie, Adeniyi and Akongwale (2012) explain that in terms of the interest rate structure, the transmission mechanism comes through the systematic response to monetary policy. A positive shock on the price of oil has the tendency of raising the inflationary expectations of the public, steepening treasury securities’ yield curve, pressuring the rise of the target for governments’ fund rate and ultimately slowing down the economic growth. Economic fluctuations are therefore not seen as resulting directly from oil price shocks.
Even thoug...

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...ne such study was conducted by Umar and Abdulhakeem (2010) and was about the effect of oil price fluctuations in Nigeria. Using the VAR model, the results revealed that oil prices affect greatly the GDP, unemployment and money supply with the impact on price index not being regarded as significant. The conclusion arrived at is that given the volatility of the economy to external shocks, the macroeconomic performance is also volatile thereby bringing about difficulties in macroeconomic management. Even though the authors use the VAR model which is most supported in the literature, the researchers do not indicate whether the effect is negative or positive and whether the volatility pointed to is only in the short run or extends to the long run. Furthermore, the study does not cover the more recent price movements that occurred during and after the financial crisis.

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