The supply of oil tends to be fixed in the short term, since it takes time to explore for new reserves or tap proven reserves. In economist lingo, the supply curve for oil is inelastic in the short run. Accordingly, an increase or decrease in the demand for oil will engender a disproportionate response on the price side.
2
Real GDP grew at about a 4.25 percent annual rate through the first three quarters of 1998; CPI inflation averaged 1.5 percent during the same period.
3
Blue Chip Economic Indicators dated December 10, 1998, and January 10, 1999, respectively.
4
The Experimental Recession Index developed by Harvard Professor James Stock and Princeton University Professor Mark Watson, which attempts to predict turning points in the business expansion, showed that as of November 2000, the probability of the U.S. economy being in recession in May 2001 was only 7 percent. The report can be obtained at http://ksghome.harvard.edu/~.JStock.Academic.Ksg/xri/INDEX.HTM.
5
In recent years, the "average" forecaster has tended to underpredict the strength of U.S. economic activity (real GDP growth and unemployment rates) and overpredict the run-up in inflation. See Kliesen (2000).
6
International Monetary Fund (2000), pp. 48-52.
7
For example, realized capital gains have boosted consumer incomes and thus spending (the wealth effect); in addition, increases in realized capital gains have caused individual tax payments to the Treasury to skyrocket, helping to produce record federal budget surpluses.
8
U.S. energy use per unit of real GDP declined at annual rates of 2.7 percent from 1973 to 1983; 1.4 percent a year from 1983 to 1995, and 2.6 percent a year from 1995 to 1999.
REFERENCES
Auerbach, Alan J., and Laurence J. Kotlikoff. Macroeconomics: An Integrated Approach (Cambridge, Mass.: The MIT Press, 1998).
Blue Chip Economic Indicators. Aspen Publishers, Inc.
Hamilton, James D. "Oil and the Macroeconomy Since World War II," Journal of Political Economy (April 1983), pp. 228-48.
International Monetary Fund. World Economic Outlook, Washington, D.C., October 2000.
Kliesen, Kevin L. "The Economic Out-look for 2000: Bulls on Parade?" Federal Reserve Bank of St. Louis National Economic Trends (January 2000).
Rasche, Robert H., and John A. Tatom. "The Effects of the New Energy Regime on Economic Capacity, Production and Prices," Review, Federal Reserve Bank of St. Louis (May 1977), pp. 2-12.
____________. "Energy Price Shocks, Aggregate Supply, and Monetary Policy: The Theory and the International Evidence," Supply Shocks, Incentives and National Wealth, Carnegie-Rochester Conference Series on Public Policy, volume 14, Karl Brunner and Allan H. Meltzer, eds., Amsterdam: North-Holland (Spring 1981), pp. 9-94.