The Effects of Oil Shocks

Peter Van Doren

Economists’ understanding of oil shocks has evolved over time. The original view was that reductions in supply from Middle East wars or OPEC decisions were important causes of oil price increases. But the more recent conclusion (p.142) is that “most major oil price fluctuations dating back to 1973 are largely explained by shifts in the demand for crude oil.”

The start of the Iran-Iraq war in the fall of 1980 is instructive about the effect of supply reductions not accompanied by major changes in demand.