Watch the nightly news during a period of rapidly rising gas prices and you will hear legitimate concerns about a cascade effect driving the economy into recession. Oil and gas prices are indeed a huge driver of the national and global economies.
A Master of Business Administration (MBA) with a concentration in Finance can equip professionals to anticipate and manage global economic crises.
Rising Oil Prices Ripple Through the Economy
High prices at the pump affect consumers’ spending on goods and services, causing them to tighten their belts, which impacts the economy. That suppresses profitability in every sector. Industries that rely on gas (including airlines, autos and public transport) and industries that depend on discretionary spending (such as restaurants, retail and travel) are especially hard-hit. Companies respond by lowering expenses, including reducing their workforces and slowing down hiring. In addition, rising unemployment drives up government spending on unemployment benefits, leading to higher taxes and reduced consumer discretionary spending. A combination of all of these can then lead to an economic spiral.
In the spring of 2022, rapidly rising gas prices resulted from severe U.S. and NATO sanctions against Russia, which led to the sixth-largest oil supply disruption since World War II. Because global oil prices are driven by an interconnected worldwide commodities market, disruptions anywhere lead to pump shock everywhere. A common misconception during 2022 was that economies not as reliant on Russian oil could be relatively unscathed.
Gas as a Significant Economic Indicator
However, gas prices are a global phenomenon and affect everyone. Let us look closely at the specific impacts to understand why gas prices are such a significant economic indicator:
- Retail: Higher gas prices mean people drive less and shop less, especially in brick-and-mortar shopping centers. Miles driven highly correlate with gas prices. Fewer shoppers force retailers to raise prices, especially on products that are expensive to ship. Many items, such as plastics, are also made partly from petroleum products, which further drives up the prices of these goods.
- Autos: Rising gas prices tend to change the supply/demand dynamics, driving consumers to purchase fuel-efficient vehicles and lowering demand and prices for otherwise popular larger vehicles, which are more profitable to build. Manufacturers respond by raising prices, which means fewer consumers can afford new cars. Used car prices rise too, and those who buy often must pinch pennies in other areas of spending.
- Airlines: Fuel accounts for such a high percentage of airlines’ overhead that even slight increases in oil prices drive up the costs of flights. This discourages non-essential travel, such as family vacations, and ripples through areas highly dependent on tourism.
- Public transport: This sector tends to benefit as oil prices rise. For those who live in metropolitan areas with public transport systems, trains, subways and buses present an economical alternative to driving. This option also preserves vehicles, keeping consumers from having to buy when prices are high.
- Jobs: Less consumer discretionary spending hurts the profitability of companies that produce goods and services for consumers, and these companies often reduce their workforce sizes as a result. With signs of economic turmoil, all types of businesses become conservative in their hiring practices as they await signs of an economic turnaround. Workers also have to consider the costs of commuting in their choices. Many opt for work-from-home jobs to reduce the impact of rising gas prices on their wallets.
- Recession and stagflation: Recession is a chief concern at any time of continued high oil prices because it refers to at least two consecutive quarters of decline in the gross domestic product (GDP). Stagflation is an economic phenomenon that combines low economic growth with high inflation and high unemployment levels. With stagflation, the three major macroeconomic variables (GDP, unemployment and inflation) drag down the economy together.
In the spring of 2022, many economists were concerned about this significant risk facing the global economy. Oil-dependent countries experienced stagflation twice during the 1970s. During the Oil Shock of 1973-1974, energy prices skyrocketed due to an OPEC embargo. This led to extremely high inflation and recession for countries reliant on oil. Then, between 1978-79, the Iranian Revolution caused a decline in the country’s oil output of nearly 5 million barrels per day, which led to a doubling of oil prices from 1979 to 1980.
How an Advanced Degree Can Help
The cascading effects of high gas prices illustrate the delicate balance of the global economy. Given the ease with which oil availability can impact economic stability, it makes sense to invest in your career and make it more resistant to economic volatility.
Earning an MBA is a solution to raising your employment and leadership prospects. MBA graduates offer employers proven, in-demand skill sets to overcome tough market and economic conditions, especially when faced with the possibility of a recession or stagflation. Southeastern Oklahoma State University’s online MBA with a Concentration in Finance program does just this, and its Management Economics course gives students the necessary knowledge to face unique economic circumstances and make well-informed decisions.
Learn more about Southeastern Oklahoma State University’s online MBA with a Concentration in Finance program.