Oil prices for oil importing countries
Have you guys heard that there are violent confrontations in some parts of Iraq? That country is one of the major producers of crude oil, which means that the price of oil might increase substantially if these conflicts don't resolve. Can you guys tell me what could be the effect of this on Peru?
If the price of oil increases, Peru and other oil importing countries would likely suffer from higher costs of production. Some activities can move from using oil to using natural gaz as an input (cars for example often have both systems in place) but these shifts can be very costly and can take a very long time.
This current increase in oil price does not seem to really come from actual scarcity of oil. The conflicts in Iraq are mostly in the North I was told, which is not where most of the oil production happens. The increase in prices is probably due to expectations of higher instability in the region (Lybia is also a potential problem), which means that prices are going up right now (real world changes) because of the belief that there will be more scarcity later (expectations)... we call that the "self-fulfilling prophecy", Economics is like a religion (except that it works) !!!!!!!
So... what should we do about it?
Aggregate Supply (AS) policies would be best in this case since they aim at reducing the costs of production and/or increasing productivity (which are often one and the same thing). Remember (those who had Macro with me), AS problems should be met with AS solutions (mostly Neo-Classicals) while AD problems should be met with AD solutions (mostly Neo-Keynesians)!!!! Don't trust the other economists telling you that only one or the other works, the world is much more complex than what they tell you!