Causes and Consequences of the Oil Shock of 2007–08

TLDR

Previous oil price shocks were mainly driven by physical supply disruptions. This paper compares the 2007–08 oil price run‑up with earlier shocks to identify causes and economic effects. The 2007–08 surge was driven by strong demand meeting stagnant global production. The study finds that, despite differing causes, the economic consequences—particularly on consumption and domestic automobile purchases—mirrored earlier shocks, and the period 2007Q4–2008Q3 should be classified as a U.S.

Abstract

This paper explores similarities and differences between the run-up of oil prices in 2007–08 and earlier oil price shocks, looking at what caused these price increases and what effects they had on the economy. Whereas previous oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007–08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been similar to those observed in earlier episodes, with significant effects on consumption spending and purchases of domestic automobiles in particular. Absent those declines, it is unlikely that the period 2007Q4–2008Q3 would have been characterized as one of recession for the United States. This episode should thus be added to the list of U.S. recessions to which oil prices appear to have made a material contribution.