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November/December 1991, 
Vol. 73, No. 6
Posted 1991-11-01

The 1990 Oil Price Hike in Perspective

by John A. Tatom

John A. Tatom discusses several popular but misleading perceptions about the changing effects of oil price shocks on the U.S. economy and policymakers’ response to such changes in the past. The author explains that the principal channel of influence of higher energy prices is a loss in economic capacity and productivity. Other channels of influence arise through the oil import bill or changing energy efficiency. Tatom compares the recent experience with the two previous oil price shocks and finds that there was little reason to expect the effects of the 1990 oil price shock to be much smaller. The most significant difference in the latest shock, says the author, is that it was more clearly temporary, so that the doubling of oil prices from July to October 1990 was virtually eliminated by offsetting movements from October to March 1991. As a result, Tatom concludes, the adverse effects of the oil price shock should be reversed almost as quickly as they occurred.