Oil Prices in the 1990s

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Here, the tremendous surge in output and consequent fall in price due in large part to innovations in hydraulic fracturing and horizontal drilling have pushed natural gas prices below their historical averages. Misled by the financial press, Americans probably think that oil prices are abnormally low, and that this somehow poses risks for the tepid economic recovery.

Prices have surged over the past four years - and there's a bunch of reasons why.

On the contrary, the surge in U. If the government would pull back from the industry and let the market work, Americans would have access to plentiful and affordable energy that would fuel a vibrant economy.

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Crude Oil Prices Figure 1 below shows the history of U. Conclusion Misled by the financial press, Americans probably think that oil prices are abnormally low, and that this somehow poses risks for the tepid economic recovery. More resilient supply-side features of economies are one aspect, as production profiles have become less energy intensive and presumably more flexible in adjusting to energy price changes. In addition, the development and deregulation of financial markets during the s should in principle also have allowed economies more flexibility in responding to oil shocks without major output disruptions or inflationary consequence Finally, the extent to which aggregate demand was affected by the oil shock - working through real income and wealth effects - should have been more limited because of the reduced share of imported oil in total production.


Oil and Natural Gas Prices in Historical Context

Why then did economic conditions deteriorate so quickly after the oil shock? In this paper we argue that three related aggregate demand factors led to weaker-than-expected output performance following the mid oil shock, all of which had also been evident at the time of the oil price hike. Specifically, the increase in uncertainty due to the Gulf crisis - over oil supplies, price hikes and regional conflict - led to a sharp fall in consumer and business confidence and related weakness in domestic demand in a number of countries.

In some respects this is similar to the uncertainty in over the Yom Kippur war in the Middle East, the oil embargo and the rise in oil prices. In addition, we argue that the momentum and intensity of the business cycle downturn in mid, much as in , had reduced the resilience of many economies to an adverse oil shock. The oil price shock and associated economic uncertainty in came at a time when a downturn was already under way and greatly weakened business conditions in several large industrial economies.

Finally, we show that a very low level of business confidence existed in several large industrial economies even before the beginning of the Gulf crisis, which not only directly contributed to the subsequent weakness in investment and consumption expenditure, but may also have magnified the decline in confidence and fall in demand growth by the end of Placing the oil shock in comparative perspective, this study investigates the role of aggregate demand factors in determining the response of the economy to oil shocks.

We provide a non-technical and eclectic review of the demand-side issues involved, with particular attention devoted to contrasting the shock with the events and consequences associated with the oil price hikes of the s in the major industrial economies. The objective is to gain an insight into the demand-side channels of oil shock transmission and how these factors have affected the output and price responses following an oil shock. In our review of past oil shocks we find that declines in output growth and increases in inflation around the time of previous oil shocks were in large measure related to demand factor.

We also argue that a focus on demand factors provides the clearest insight into why the price swing had such adverse, and largely unanticipated, effects on the real economy. The structure of this paper is based on the three basic channels through which aggregate demand factors may influence the response of the economy to an increase in oil prices.

First, we identify factors which influence the magnitude of the direct aggregate demand effect of an oil shock.

1990 oil price shock

By this we mean factors such as the degree of dependence on imported oil and the ability to substitute other non-oil energy sources, which determine the ultimate terms-of-trade and wealth effects of an oil shock on aggregate demand. Secondly, we consider the initial cyclical demand conditions at the time of the oil shock and evaluate their likely effects on the transmission of oil shocks to real activity and inflation.

In particular, we compare demand conditions prevailing in mid - factors such as capacity constraints, inflation and wage pressures and business conditions - with those prevailing prior to the two oil shocks in the s and assess whether they tended to be more or less favourable. Finally, we consider the aggregate demand policy responses to previous oil shocks, in their fiscal and monetary dimensions, and evaluate the role they played in determining the ultimate pattern of output and inflation.

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Our concentration is on broad differences in policies between the periods and, for that purpose, we do not attempt a detailed country-specific analysis. The analysis is organised as follows. Section II considers changes in the structural features of the major industrial economies which influence the real income and wealth effects of an oil price shock, and thereby directly affect the demand response. Section III examines cyclical conditions from the same perspective, and Section 1V reviews previous policy responses to oil shocks and the state of policy immediately following the oil shock.

Section V summarises the findings. This website requires javascript for proper use.

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