Oil Prices: After the High, What Do Developing Market Economies Do

Abstract

The COVID-19 pandemic illustrated the relevance of oil prices to the modern-day economy. Government-imposed lockdowns to slow the spread of the virus is reversed, and economic growth is slowly recovering across advanced and developing market economies. The current price of crude oil threatens the global economic recovery as oil is an essential part of industrial and manufacturing value-chains. When the price of crude oil rises, this automatically raises the cost of intermediate products.
The general price of goods and services has risen for advanced economies, and central banks have cautioned about inflation rising too high above their objective. At the time of writing, oil prices currently sit at $83.54 /bl and have averaged $66.48/bl since the start of 2021, while the U.S.
Economists and experts have illustrated the link between higher oil prices and robust economic growth in developing market economies. Research equally shows a clear link between higher oil prices and stronger currencies, smaller current account deficits and higher levels of exports. Commodity-exporters will benefit from higher oil prices, but what happens after they return to more normal levels? The favourable economic indicators tend to reverse, and these economies immediately begin experiencing macroeconomic issues because they remain dependent on commodity exports. To put this into context, oil exports account for 86% of community exports in six central African countries and equate to over 50% of government revenues.
This article focuses on longer-term indicators to better understand the impact of oil prices and their implications on macroeconomic variables. Specifically, it outlines the effects of higher oil prices on financial flows. Short-term cyclical movements in oil prices impact macroeconomic variables such as GDP, FX and debt-to-GDP ratios.

Keywords: oil prices , developing countries, world markets , financial markets , crude oil, commodity prices