It must be highlighted that the oil industry is an oligopolistic industry, which is dominated by oil-rich nations. A maximum number of economies are directly dependent on oil imports from producing and exporting nations to fulfil their domestic oil demand by residential, commercial and industrial consumers. The oil is then used for energy production, in automobiles, in industries, in the transportation of goods through rail, road, air and sea and for other purposes. High oil prices result in an increase in energy costs that in turn increases the entire manufacturing industry and supply chain because the costs of goods increase.
In other words, this leads to inflation that then compels the employers to increase wages and salaries of employees who now demand high wages for their services. In addition, the costs of other inputs, transportation, related supporting industries also increase that further aggravates the situation and result in aggregate higher prices of the final product to the end user. In short, the real incomes and purchasing power of consumers reduce that in turn decrease the demand for final products and number of transactions.
So, businesses are doubly affected by this vicious cycle that turns violent for emerging economies that depend on oil energy compared to developed nations that use alternative energy resources. The government then has to announce subsidies, tax incentives and rebates that add to its financial burden. Also, the overall shrinkage or contraction in economy reduces its tax revenue from businesses and consumers respectively. Economic recession refers to the meltdown of the economy that in turn results in contraction, shrinkage or negative growth. The global economic meltdown started in the United States when the US property market crashed due to the failure of the sub-prime mortgage scheme.
This then resulted in financial crises, credit crunch, bankruptcies and debacle of many US small and large financial institutions, especially the downfall of Lehman Brothers, which were dependent on interest income from property mortgage schemes. The banks then involved in retrenchments, layoffs and dismissals.
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