Fundamentals of Economics. Доловова Н.Н - 65 стр.

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Oil and the Economy
Some of the largest economic fluctuations in the U.S. economy have originated
in the oil fields of the Middle East. Crude oil is a key input into the production of
many goods and services, and much of the world's oil comes from Saudi Arabia,
Kuwait, and other Middle Eastern countries. When some event (usually political in
origin) reduces the supply of crude oil flowing from this region, the price of oil rises
around the world. U.S. firms that produce gasoline, tires, and many other products
experience rising costs. The result is a leftward shift in the aggregate-supply curve,
which in turn leads to stagflation.
The first episode of this sort occurred in the mid-1970s. The countries with
large oil reserves got together as members of OPEC, the Organization of Petroleum
Exporting Countries. OPEC was a cartel—a group of sellers that attempts to thwart
competition and reduce production in order to raise prices. And, indeed, oil prices
rose substantially. From 1973 to 1975, oil approximately doubled in price. Oil-
importing countries around the world experienced simultaneous inflation and
recession. In the United States, the inflation rate exceeded 10 percent for the first
time in decades. Unemployment rose from 4.9 percent in 1973 to 8.5 percent in 1975.
Almost the same thing happened again a few years later. In the late 1970s, the
OPEC countries again restricted the supply of oil in order to raise the price. From
1978 to 1981, the price of oil more than doubled. Once again, the result was
stagflation. Inflation, which had subsided somewhat after the first OPEC event, again
rose above 10 percent per year. Unemployment rose from about 6 percent in 1978
and 1979 to about 10 percent a few years later.
The world market for oil can also be a source of favorable shifts in aggregate
supply. In 1986 squabbling broke out among members of OPEC. Member countries
reneged on their agreements to restrict oil production. In the world market for crude
oil, prices fell by about half. This fall in oil prices reduced costs to U.S. firms, which
shifted the aggregate-supply curve to the right. As a result, the U.S. economy
experienced the opposite of stagflation: Output grew rapidly, unemployment fell, and
the inflation rate reached its lowest level in many years.
In recent years, the world market for oil has been relatively quiet. The only
exception has been a brief period during 1990, just before the Persian Gulf War,
when oil prices temporarily spiked up out of fear that a long military conflict might
disrupt oil production. Yet this recent tranquility does not mean that the United States
no longer needs to worry about oil prices. Political troubles in the Middle East (or
greater cooperation among the members of OPEC) could always send oil prices
higher. The macroeconomic result of a large rise in oil prices would most likely
resemble the stagflation of the 1970s.

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