Oil Prices and Inflation Dynamics an Evidence From Pakistan

Abstract

Inflation means, an overall rise in the cost of goods and services. According to (Ackley, 2020) inflation is the term used to describe price increase for commodities, goods, and services. According to (Friedman, 1963) inflation occurs when we purchase an excessive number of small items for a large sum of money. This is because, despite an increase in income, prices rise quickly during an inflation, causing us to buy fewer items at high prices, which results in a decline in the value of our money. In the long run, inflation is a financial phenomenon that occurs everywhere and constantly. Secondly, talking about oil dynamics. Oil is one of the most crucial and beneficial elements that is present on earth. The use of fuel serves as a transportation facility, at home and other petroleum products help humanity in various daily life activities. The use of oil is not limited to the living but is an essential weapon in the situation of war and acts as fuel for airplanes and shapes as well. Oil is used as a resource of energy that is supplied to industries for production and providing services as well (Sarwar, 2019). As oil has been of great importance to fluctuations, oil also impacts the economies of the countries. The low oil prices lead to higher efficient product making because of low resources being utilized for manufacturing which also enhances the overall GDP of nations, But the countries that are exporting oil products might see a downfall because of the low budget that is collected from the foreign countries. So, it can be said that the downfall of oil prices might lead to generating low revenues for countries like Russia and Venezuela because they are the top oil-exporting countries (Ulmer & Parraga, 2022). There is a certain cost of extraction and purification of oil products that are done through separation within oil refineries that in the short run sold out and might not produce many revenues. Around the world, the majority of nations are oil-importing nations, and as a result of the fluctuating price of oil, they encounter numerous issues. There are several reasons for which the increase in prices impacts the overall economy. Most of the country’s economies are dependent upon the industrial sector and mainly in Pakistan as well (Asif & Muneer, 2005). When the oil prices are raised or increased the industries tend to produce the products at a higher cost. There are multiple reasons for the production rate being increased. Most of the industries in Pakistan are based on the textile sector which requires a lot of chemical raw materials for production (Latif & Javid, 2016). Most of these products are imported from outside. Because of the higher oil prices, Page | 3 FINAL YEAR PROJECT the transportation cost increases to bring these raw materials for purpose of production. The overall cost of production is increased, and low efficiency is witnessed if the prices of the final products by the organization are not increased. Thus, the overall revenue of the industry is compromised that eventually leading to poor economic growth in that state or country (Nazir, 2014). The variety of other sectors in Pakistan is also impacted by the increase in price because most of the energy generation in the country is derived from petroleum products.