Oil price shocks.

• Author: Hamilton, James D.
• Position: Research Summaries

The first decade of the new millennium brought a dramatic increase in the real price of crude petroleum. The price (in 2009 dollars) rose from about $30 a barrel in 2003 to an average of nearly $100 a barrel in 2008 (see the far right panel of Figure 1). Such a rapid price increase was not unprecedented, though. The price of oil rose similarly during the 1970s (middle panel) and during the U.S. Civil War (left panel).

The oil price increase during the 1970s was spurred by three dramatic geopolitical events: the embargo and production cutbacks by the Arab members of OPEC in 1973-4; the Iranian revolution in 1978-9; and the Iran-Iraq war which began in 1980. A century earlier, strong demand associated with the U.S. Civil War and a big tax on crude's competitor, alcohol, were factors in a comparable boom. By contrast, the oil price run-up of 2005-8 did not seem to be associated with significant geopolitical disruptions.

The three episodes shown in Figure 1 have one theme in common: declining production from the maturing oilfields on which the world had been depending at the time. Flows from the initial Pennsylvanian fields fell quickly as the reservoirs were exploited, and total world oil production fell during 1862-4 before more productive new fields were found to replace them. Thanks to discoveries in Texas and California, for example, the United States was to remain the world's biggest oil producer until the early 1970s, when production from maturing U.S. fields began what proved to be a permanent decline (see Figure 2, on the following page). That loss of U.S. production was one reason the world suddenly came to depend so much more on the volatile Middle East. Over the most recent decade, production has begun to fall significantly from mature fields in the North Sea and Mexico, and output from Saudi Arabia failed to increase. In recent assessments, (1) I conclude that stagnating global production coinciding with remarkable growth in demand from the newly industrialized economies were the most important factors in the oil price increases over 2005-8.

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I review the history of the oil market in a new working paper. (2) Table 1, also on the following page, presents from that research the summary of the five most recent petroleum supply disruptions. In most of these episodes, the lost oil production from the affected countries was offset in part by production increases elsewhere. Boosts in production from Saudi Arabia were the...