Effect of Iraq Crisis on Global Economy

Iraq Crisis

The eyes of the world are riveted on Iraq. Why? Because Iraq produces 3.3 million barrels of oil each day, and any disruption in the supply of Iraq's oil due to the ongoing crisis could create a cascading effect on oil prices. Past experience has shown that the rise in price of crude oil has been a key element in the unleashing of the global economic crises.

Thus, the impact of the Iraq crisis can be observed from 2 aspects:

• Net Oil exporting countries

• Net Oil importing countries

For net oil-exporting countries, a price increase directly increases real national income through higher export earnings, but part of this gain would be later offset by losses from lower demand for other exports generally due to the economic recession suffered by trading partners.

Now we'll talk about the impact on net oil importing countries.

• Higher oil prices will lead to cost push inflation, increased input costs and reduced non-oil demand. Resistance to real declines in wages could lead to upward pressure on nominal wage levels. Wage pressures together with reduced demand lead to higher unemployment.

• International capital market valuations of equity and debt would be revised downwards. As the credit worthiness of some importing countries running large current account deficits is called into question, there would be upward pressure on interest rates. Tighter monetary policies to contain inflation would add to this pressure.

• Higher oil prices would lead to appreciation of the US dollar and sharp currency depreciations in developing oil importing countries. A stronger dollar would raise the cost of servicing the external debt. It would also