Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Oil shocks have limited effect on growth of G7 countries

28.02.2006


How do shortfalls in crude oil production caused by wars and other political events in the Middle East affect oil prices, economic growth and inflation in major industrialized countries? Lutz Kilian investigates this question in CEPR Discussion Paper No. 5404 ‘The Effects of Exogenous Oil Supply Shocks on Output and Inflation: Evidence From the G7 Countries’. He notes that public discussion of this question has been shaped by the economic experience of the 1970s and early 1980s. The public’s collective memory of these experiences leaves little doubt that oil supply shocks are to blame for the economic malaise of the 1970s. This has led to the concern that history might repeat itself if a new oil supply shock were to occur.



It is not clear whether that public perception is correct, however. Lutz Kilian argues that, by any measure, a substantial component of the observed movements in the price of crude oil reflect shifts in demand for oil driven by macroeconomic conditions. Thus one cannot simply assume that major oil price increases are necessarily driven by events such as wars and political conflicts in the Middle East. Kilian proposes an alternative direct measure of exogenous oil production shortfalls based on plausible assumptions about how OPEC oil production would have evolved without political turmoil in the Middle East. ’Exogenous’ here means that the shock to crude oil production is driven by political forces in oil-producing countries that evolve indpendently of the state of the global economy.

Using this measure he has a fresh look at the historical experience of the G7 countries during previous oil supply shocks. His analysis produces the following findings:


· In the absence of the exogenous oil supply shocks that took place during 1973/74, 1978/79, 1980, 1990/91, and 2002/2003 the evolution of CPI inflation in the G7 countries would have been remarkably similar overall to its actual path. This evidence is consistent with the view that the high inflation of the 1970s was caused by domestic policies rather than external shocks.

· There is no evidence that the 1973/74 and 2002/03 oil supply shocks had a substantial impact on real growth in any G7 country. This finding is consistent with an important role for demand-led oil price increases during these episodes. In contrast, for some G7 countries, the 1978/79, 1980 and 1990/91 shocks contributed to lower real growth, although not as much as one might have conjectured.

· Kilian finds that there is a fair degree of similarity in the real GDP growth responses of G7 economies to exogenous oil supply shocks. An oil supply disruption can be expected to cause a temporary reduction in real GDP growth that is concentrated in the second year after the shock. While there is considerable uncertainty about the true magnitude of this effect, given the small number of historical oil supply shocks available for study, the data suggest that a 5 percent permanent reduction in oil supply tends to reduce real GDP growth by about two percentage points in the second year after the reduction. Oil supply shocks typically have little effect on real growth either before or after the second year.

· These estimates, however, ignore the fact that historically exogenous oil production shortfalls have been temporary; with negative oil supply shocks being followed by positive shocks. Such offsetting shocks would tend to lower the overall impact of the initial reduction.

· Consumer price inflation responses are more varied across G7 countries. The inflation response typically peaks after three to four quarters. The evidence suggests that exogenous oil supply disruptions by themselves do not generate sustained inflation or stagflation. Evidence of sustained inflation and stagflation in some G7 countries – such as Germany – therefore must reflect a favourable institutional environment.

Author: Lutz Kilian (University of Michigan and CEPR)

Robbie Lonie | alfa
Further information:
http://www.cepr.org

More articles from Business and Finance:

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Neutron star merger directly observed for the first time

University of Maryland researchers contribute to historic detection of gravitational waves and light created by event

On August 17, 2017, at 12:41:04 UTC, scientists made the first direct observation of a merger between two neutron stars--the dense, collapsed cores that remain...

Im Focus: Breaking: the first light from two neutron stars merging

Seven new papers describe the first-ever detection of light from a gravitational wave source. The event, caused by two neutron stars colliding and merging together, was dubbed GW170817 because it sent ripples through space-time that reached Earth on 2017 August 17. Around the world, hundreds of excited astronomers mobilized quickly and were able to observe the event using numerous telescopes, providing a wealth of new data.

Previous detections of gravitational waves have all involved the merger of two black holes, a feat that won the 2017 Nobel Prize in Physics earlier this month....

Im Focus: Smart sensors for efficient processes

Material defects in end products can quickly result in failures in many areas of industry, and have a massive impact on the safe use of their products. This is why, in the field of quality assurance, intelligent, nondestructive sensor systems play a key role. They allow testing components and parts in a rapid and cost-efficient manner without destroying the actual product or changing its surface. Experts from the Fraunhofer IZFP in Saarbrücken will be presenting two exhibits at the Blechexpo in Stuttgart from 7–10 November 2017 that allow fast, reliable, and automated characterization of materials and detection of defects (Hall 5, Booth 5306).

When quality testing uses time-consuming destructive test methods, it can result in enormous costs due to damaging or destroying the products. And given that...

Im Focus: Cold molecules on collision course

Using a new cooling technique MPQ scientists succeed at observing collisions in a dense beam of cold and slow dipolar molecules.

How do chemical reactions proceed at extremely low temperatures? The answer requires the investigation of molecular samples that are cold, dense, and slow at...

Im Focus: Shrinking the proton again!

Scientists from the Max Planck Institute of Quantum Optics, using high precision laser spectroscopy of atomic hydrogen, confirm the surprisingly small value of the proton radius determined from muonic hydrogen.

It was one of the breakthroughs of the year 2010: Laser spectroscopy of muonic hydrogen resulted in a value for the proton charge radius that was significantly...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ASEAN Member States discuss the future role of renewable energy

17.10.2017 | Event News

World Health Summit 2017: International experts set the course for the future of Global Health

10.10.2017 | Event News

Climate Engineering Conference 2017 Opens in Berlin

10.10.2017 | Event News

 
Latest News

Terahertz spectroscopy goes nano

20.10.2017 | Information Technology

Strange but true: Turning a material upside down can sometimes make it softer

20.10.2017 | Materials Sciences

NRL clarifies valley polarization for electronic and optoelectronic technologies

20.10.2017 | Interdisciplinary Research

VideoLinks
B2B-VideoLinks
More VideoLinks >>>