When the economy is hit with a supply shock, such as oil prices rising from $25 a barrel to $75 a barrel, why is this doubly disruptive and harmful to the economy?

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Business

Niko Bush

6 May, 23:05

When the economy is hit with a supply shock, such as oil prices rising from $25 a barrel to $75 a barrel, why is this doubly disruptive and harmful to the economy?

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Brendon Durham · Answer 1

When the economy is hit with a supply shock, especially if it is something as important as the oil, and its price doubles or triples, than the whole economy will suffer.

The reason for that is that the oil (since we took it as example) is not influencing only the people and the companies that use as fuel, but it affects the prices of pretty much all products. Such an increase in the price will result in much bigger expenditure by the production facilities. The transportation companies will also have much increased expenses. And that will result in a much increased price in most of the products. That will hit the people very hard on their pockets, as they will come in a situation where their wages are the same as they were, but the prices of everything went significantly up in no time.