The breathtakingly sharp increase in the price of oil in the last half of 2007 and first half of 2008 has led many to argue that increased speculation in commodity markets has played a role, and indeed there is evidence of increased activity in these markets. These economies have become increasingly industrialized and urbanized, which has contributed to an increase in the world demand for oil. In addition, in recent years fears of supply disruptions have been spurred by turmoil in oil-producing countries such as Nigeria, Venezuela, Iraq, and Iran ( Brown 2006). 2 Global demand for oil has been increasing, outpacing any gains in oil production and excess capacity. A large reason is that developing nations, especially China and India, have been growing rapidly. It is likely that both increases in demand and fears of supply disruptions have exerted upward pressure on oil prices. You can also see that by the spring of 2008, as this posting was prepared, the real price of oil has easily exceeded that of the late 1970s. You can see that real oil prices have varied a lot over time, and large fluctuations tend to be concentrated over somewhat short periods. In essence, the “real” measure allows you to compare oil prices over time in a way that you can’t when inflation is also part of the change in price. 1 This removes the effect of inflation and thus gives a more accurate sense of what is happening to the price of the commodity itself. Since then, oil prices have regularly displayed volatility relative to the ’50s and ’60s.įigure 2 shows the “real” oil price, calculated by dividing the price of oil by the GDP deflator. In fact, the 1970s show two distinct jumps in oil prices: one was triggered by the Yom Kippur War in 1973, and one was prompted by the Iranian Revolution of 1979. The gray bars in this and all the following figures represent recessions, as defined by the National Bureau of Economic Research.Īs you can see from Figure 1, a long period of oil price stability was interrupted in 1973. ![]() The price shown is the monthly average spot price of a barrel of West Texas intermediate crude oil, measured in U.S. How have oil prices behaved in recent decades?įigure 1 shows the history of the price of oil since the early 1950s. Let me begin by discussing the evolution of oil prices over time. What a daunting question! With oil prices increasing rapidly in the recent past, it is hard not to wonder what has caused it and just what effect it might have on the rest of the economy.
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