The Federal Reserve has threatened to raise interest rates if inflation gets too high. However, in recent discussions with the central bank, crude oil prices have been a topic of concern. The price of crude oil can affect the general price of goods and services in the economy because it is hard to find things that consumers or businesses consider cheap enough without it. This article discusses how changes in the price of crude oil will impact inflation.
Inflation is not simply a rise in prices of goods and services — it can affect different aspects of life for citizens, from jobs to finances. However, the Fed’s main goal is to ensure that prices rise at a steady pace each year. They do this by taking measures like raising interest rates and making it more expensive to borrow money. These policies can also make it challenging for banks and other financial institutions to make a profit, which can affect the business world as well.
Crude oil price
It changes and the Fed’s policies have somewhat of an inverse effect on each other. When crude oil prices fall — or lessen, in other words — the cost of production falls as well. Which could help businesses and possibly encourage them to hire more workers. Lower interest rates may also help these businesses get loans or invest in special projects. Which will also create more employment opportunities. If the price of oil goes up, however, businesses may not be able to handle the costs of production and might have to lay off workers or stop taking on new projects.
Oil’s Impact on the Economy
The cost of crude plays an essential role in America’s economy. It is the most important raw material for the production of plastics, rubber, drugs and many other manufacturing products. It’s also used in transportation — from fossil fuels used to power cars to jet fuel used by aircraft — and almost every aspect of daily life.
Crude oil is also a key component for producing many other goods and services. For example, it is found in the production of steel and aluminum, which are important to modern industry.
The domestic oil industry involves about 40% of all U.S. crude production, though more than half of that comes from imported oil (U.S. Energy Information Administration). Oil from domestic sources is used to make plastics, fertilizers, pesticides, many other organic materials and several finished products.
According to the U.S. Energy Information Administration, oil-exporting countries can be divided into two groups: “developing nations,” which include Algeria, Azerbaijan, Angola, Bolivia, Chad and Equatorial Guinea; and “developed nations,” which include Canada and China. While they receive a share of the income from oil exports in these two groups of countries might vary depending on the price of crude oil each individual country receives its share of income. (For more, see: What is Crude Oil? )
Oil products, other than crude oil, are also vital to the economy. These include plastics and synthetic fibers such as rayon, nylon and polyester. Other components used in synthetic materials include petroleum-based products such as gasoline, diesel fuel, jet fuel and kerosene used in industry and transportation.
Crude oil also represents a large percentage of the consumer spending that happens in the U.S. According to the U.S. Energy Information Administration, crude oil accounts for about 6% of consumer spending (U.S. Census Bureau). This compares with just 2% of consumer spending on natural gas (U.S. Census Bureau).
The Cost to Produce Crude Oil
Crude oil prices are determined by several factors. The price per barrel directly influences the total revenue produced from global exports. The U.S., for example, is one of the world’s largest importers, reaping significant economic benefits from this activity according to Forbes. (For more, see: How Does Crude Oil Affect the Economy?)
The costs of producing crude oil vary significantly among countries. The average cost to produce crude oil varies from less than $7 a barrel in Saudi Arabia to more than $25 in the United States. These price differences are due to differences in labor and land costs, as well as other expenses. (For related reading, see: Reasons for Different Crude Oil Prices.)
What is Crude Oil Anyway?
Crude oil is essentially a type of black liquid with properties found in natural gas and solid fuels like coal. Crude is the result of a combination of many hydrocarbons. It also contains other organic compounds that are found in crude oil, like sulfur and nitrogen. The primary material that gives this liquid its black color is its high concentration of hydrogen (U.S. Energy Information Administration).
While crude composition varies significantly, all forms of it are composed mostly of hydrocarbons and then contain several other trace materials (U.S. Energy Information Administration). One exception to this rule is the Athabasca Tar Sands located in Alberta, Canada, which contain a thick form of bitumen called diluted bitumen (Enbridge).
