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Causes and Consequences of the Oil Shock of 2004

That's the title of a short essay by Professor James Hamilton, who wrote the seminal paper on the effects of oil shocks on the economy. It's a succinct and sober analysis of the present situation in the world oil market, and belongs on the commentary page of a major newspaper. The major points: 1. This is not a classic supply shock: oil production has increased, but not sufficiently to offset increases in demand driven by economic growth, particularly in Asia. 2. Current oil prices look ominous in comparison to prices last fall, but are only 15% higher than prices last spring. Price "spikes" such as this have not led to significant downturns in the economy in the past. 3. US policies on the supply side need to change (a view that I share): "The reduction in the number of refineries and the proliferation of legally required gasoline formulations raise costs and greatly reduce the competitiveness of individual markets, making the gasoline price mark-up over crude costs unacceptably vulnerable to small supply disruptions. Easing the rules for new refinery construction, as proposed in the energy plan that President Bush submitted to Congress in 2001 but on which the U.S. Senate has yet to act, and agreeing on a single nation-wide standard for gasoline formulation, are clearly important steps that need to be taken."

That's the bottom line, but I recommend you read the entire essay. Thanks to Ron Johnson for the link.