View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Economic SYNOPSES
short essays and reports on the economic issues of the day
2004 ■ Number 16

Will Oil Prices Choke Growth?
Christopher J. Neely
il price hikes have often preceded global recessions in
the modern era. Recently, oil prices have been rising
again. The price of a barrel of Brent crude bottomed
out at $16.57 on November 15, 2001—as disruptions from the
September 11, 2001, attacks reduced demand from air traffic
and related economic activity—before rising to $39.07 on
May 17, 2004. Will recent oil price increases bring the current
growth to a premature end?
James Hamilton, a noted researcher on the macroeconomics
of oil shocks, argues that several factors differentiate the current
situation from those of past recessions.1 He points out that
the source and size of the recent oil price surge might mean
there is less risk for the economy than one might think.
One difference is that past oil shocks—like those of the
1970s—resulted from restrictions of supply that raised the
price of oil. In the present situation, rapidly growing demand
from the world economy has bid up the price of oil. The top
figure shows the oil consumption of four of the five largest oilconsuming nations (excluding Germany). U.S. and Chinese
consumption has been expanding rapidly, as these two nations
have enjoyed vigorous growth recently.
A second difference is that part of the recent uptick in oil
prices merely retraces earlier price declines. Comparing current
prices to the lows of the fall and winter of 2001 is misleading;
prices of Brent crude were above $30 in 2000 and in January
2003. An increase from $30 to $36 is very modest compared
with the doubling or tripling of prices seen in 1974 and 1979.
Further, real oil prices were much higher in 1979 than they
are today, about $80 a barrel in 2004 dollars.
Oil is also relatively less important to the U.S. economy
than it was in the past. The lower figure illustrates that oil
consumption per unit of real GDP has fallen about 50 percent
in the United States and Japan since 1970. A shift of U.S. and
Japanese output to high-tech manufacturing, as well as vehicles and machinery that are more fuel-efficient probably contributed to this drop. Chinese output data are probably less
reliable over long periods but there appears to have been a
large drop in oil consumption per unit of output since the
1970s. In contrast, oil has become more important to Indian
output as its formerly agrarian economy has industrialized.

O

One also would hope that regulatory and monetary policy
responses to oil price changes have improved since the 1970s.
To the extent that this is true, it provides another reason to be
sanguine about the economic effect of the latest oil price rises.
On the other hand, concerns about Middle Eastern political
tensions could be generating speculative accumulation of inventories, driving some of the recent increase in oil prices. If such
fears were realized—if supplies from the Persian Gulf region were
significantly disrupted—the world price of oil could quickly
soar, with serious consequences for the global economy. ■
1

See Hamilton’s “Causes and Consequences of the Oil Shock of 2004” and
“Historical Effects of Oil Shocks,” available at http://weber.ucsd.edu/~jhamilto/.

Oil Consumption in Mils of Barrels per Day
United States
22

China/Japan/India
8

20

6

18

4

16

2
0

14
1970

1978

1986

1994

2002

Oil Consumption per unit of Output
Oil/Output (1970=100)
250
200
150
100
50
0
1970

1978
US

1986
CHINA

1994
JAPAN

2002
INDIA

SOURCE: British Petroleum, International Financial Statistics, and the
author’s calculations.

Views expressed do not necessarily reflect official positions of the Federal Reserve System.

research.stlouisfed.org