|
...indeed more than tripled, from $20 in 2001:Q4 to $62 in 2006:Q3 (in 2007 dollars). But the ailments associated with earlier oil-price increases did not appear. Instead output grew rapidly, inflation was moderate, unemployment fell, and consumers remained reasonably happy. (1)
Macroeconomists would be out of business if there were no surprises. The business of this paper is to inquire into the explanations for the surprising oil noncrisis of the early to mid-2000s. The robustness of the economy following the latest oil shock can perhaps be seen in the context of an important historical development in macroeconomics, namely, the Great Moderation. Over the past half-century, the economy has shown declining volatility of inflation, unemployment, and output growth. (2) Perhaps the moderated response of the economy to the latest oil shock should be understood as part of this overall decline in volatility.
Although much has been written about the macroeconomic impacts of price shocks, little analysis is available on the impact of the most recent oil price shock. (3) Most research focuses on the role of monetary policy and inflation dynamics in the wake of a shock. There seems to be no consensus as to whether the macroeconomic fear of oil-price shocks remains warranted.
Comparing Shocks Past and Present
To begin, I define an oil-price shock as an inward shift in the supply curve for crude oil triggered by political events exogenous to the oil market and the macroeconomy. The four oil-price shocks considered here, summary statistics for which are shown in table 1, are associated with the 1973 Arab-Israeli war, the 1978 Iranian revolution, the 1990 Iraqi invasion of Kuwait, and the 2002 run-up to the American invasion of Iraq. Other periods might be considered, such as the price blip from 1998 to 2000 or the recovery from the OPEC price-cutting war of 1986, but these probably reflected cartel dynamics and were not clearly triggered by exogenous political events.
The first date shown for each event in the table is that when the oil shock began, and the second is that when oil prices peaked. The first numerical column shows the corresponding percentage increase in the real price of oil from start to peak. (The oil price measure used here is the average refiner acquisition cost of crude oil, except during the period of price controls, 1973:Q3-1982:Q4, when it is the import cost. The oil price is deflated by the price index of personal consumption expenditures, or PCE.) The most recent event involved a real oil-price increase of 125 percent, close to the size of the 1978-81 increase but smaller than that in 1973-75.
The next two columns show the macroeconomic response in terms of the unemployment rate and output (the latter expressed as the ratio of actual to potential GDP). The latest shock did not appear to have the recessionary impact on the economy seen in the three earlier shocks. The unemployment rate actually fell by slightly more than ! percentage point, and output grew slightly relative to potential. This contrasts sharply with the shocks of the 1970s, when the unemployment rate rose by between 1 1/2 and 3 1/2 percentage points and output declined sharply relative to potential.
Although the latest oil shock did not lead to a recession, the impacts on inflation and productivity were in the same direction as those from the shocks of the 1970s. But the impacts were different in magnitude: inflation during the 2002-06 shock rose about 1 1/4 percentage points--much less than the sharp rise in the 1970s, and labor productivity growth declined by about 1/2 percentage point, less than the average in the 1970s as well.
In short, table 1 reveals that the most recent oil shock is qualitatively more similar to earlier shocks than might at first appear. Inflation rose and productivity fell, as they did in response to earlier shocks. The major difference is that the latest oil shock was followed by a continued economic expansion rather than a recession.
Why Are Oil-Price Shocks Contractionary?
The first challenge is to understand why oil-price shocks might reduce real output in the first place. There are basically two sets of reasons: effects on productivity and effects on aggregate demand.
The effect of any energy-price shock on productivity involves substitution of other factors for energy in response to the higher energy price. In a world in which technological change is exogenous, there will actually be no response of multifactor productivity to price changes; the only response is substitution along a given technological frontier. However, if the focus is on partial productivity measures, such as labor productivity, then there might be a response, such as when labor is substituted for energy.
It is easy to forget how small the substitution response would be. To begin with, in a full-employment world, there would be no productivity response in the short run until substitution occurs. If people continued driving, flying, and using existing capital equipment at the same rate as before the price shock, all inputs and outputs would be identical, and there would consequently be no productivity impact.
Even after substitution occurs, the effect would be quite limited, as can be seen in an illustrative calculation. In a simplified, one-product neoclassical world, the labor productivity response to an oil-price change is approximately proportional to the elasticity of output with respect to the oil price (taken to be 3 percent here) times the price elasticity of demand for oil times the logarithmic change in the oil price. To calculate the demand elasticity, I take 1973:Q1 to 1992:Q4 as a sample period in which short-run movements in oil prices were dominated by supply changes. For this period the elasticity is estimated to be -0.015 ([+ or...
NOTE: All illustrations and photos
have been removed from this article.
Looking for additional articles?
Search our database of over 3 million articles.
Looking for more in-depth information on this industry?
Search our complete database of Industry & Market reports by text, subject, publication
name or publication date.
About Goliath
Whether you're looking for sales prospects, competitive information, company
analysis or best practices in managing your organization,
Goliath can help you meet your business needs.
Our extensive business information databases empower business
professionals with both the breadth and depth of credible,
authoritative information they need to support their business
goals. Whether it be strategic planning, sales prospecting,
company research or defining management best practices -
Goliath is your leading source for accurate information.
|
