August 21, 2004


An Oil Shock That Could Be an Economic Stimulus in Disguise (EDUARDO PORTER, 8/21/04, NY Times)

How much will expensive oil hurt?

Over the last 30 years, the United States has been driven into recession three times by abrupt surges in the price of oil. As the price of crude has surged over the last two weeks, reaching new heights almost daily, some economists have begun to worry that the current "oil shock" will slam the brakes on the nation's economic expansion again.

It probably won't. Despite the disquieting parallels with the oil shocks of the 1970's, the 1980's and the 1990's, the impact of the current oil spike on the American economy is likely to be much less intense than in previous surges.

Not only is the economy much more energy-efficient - gasoline prices have been stable in recent weeks - but, more important, in contrast to previous periods when oil shocks occurred, inflation remains under control. So rather than pushing up interest rates and compounding the economic slowdown, rising energy prices today are slowing the rise of interest rates, providing an unexpected dollop of economic stimulus on the side.

This would be funnier if it didn't reflect how seriously the conventional wisdom has disconnected from reality: "even with oil prices rising inflation is quiet, but the rising price of oil is preventing the Fed from raising interest rates as much as it normally would to fight the inflation that I just said is nonexistent."

Posted by Orrin Judd at August 21, 2004 3:54 PM
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