NCPA - National Center for Policy Analysis

U.S. Less Vulnerable To Oil Price Shocks

September 7, 2000

The huge increases in OPEC oil prices which occurred almost overnight in 1978 and 1979 played havoc with the U.S. economy. But analysts say increases of comparable magnitude today could be absorbed without starting an inflationary spiral.

That's because we are much better prepared today, says Goldman, Sachs & Co. economist William C. Dudley.

  • If oil increased to $50 a barrel -- from about $21 a year ago -- that would be roughly equal the percentage price increase that rocked the economy in '78 and '79.
  • But businesses and consumers use oil much more efficiently today -- for instance, real Gross Domestic Product rose more than 20 percent over the past five years while oil consumption increased just 9 percent.
  • The 43 percent oil price increase over the past year has had practically no effect on inflationary expectations or on consumer confidence and financial conditions.

While economists do not take oil price hikes lightly, they predict that any shock is likely to be short-lived. That is because technology has reduced the price of exploring for new oil.

Dudley says that the long-run equilibrium price for crude oil is only about $17.50 a barrel -- far less than today's approximately $30 a barrel. So eventually supply will increase enough to hold down prices.

Source: Charles J. Whalen, "Oil: Shocks, But No Megashocks," Business Week, September 11, 2000.


Browse more articles on Economic Issues