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Oil and Marco

In: Business and Management

Submitted By zBillyZzZ
Words 1561
Pages 7
Oil and the U.S. Macroeconomy

Prepared by:

Thao Nguyen

Arizona Western College

November 11, 2008
ARTICLE REVIEW December 2001, the average oil price was $19.33. After a brief decline from $74 to $55 per barrel in January 2007, it then resumed its price to $90 per barrel in October 2007. Participants and traders couldn’t foresee the sharp rise in price; however, some economist and analysts correctly predicted the price would go over $100 per barrel and US economy to fall into recession. In his article named “Oil and the U.S. Macroeconomy: An Update and a Simple Forecasting Exercise”, Kliesen shows that if the price of crude oil is permanently increasing to either $100 or $150 per barrel would cause a modest slowing in real gross domestic products (GDP) growth and its major components relative to base line forecast without oil price. The result of this could be somewhat very important due to the weak GDP growth over the first half of 2008. Besides that, in the article, the model which the author use also predict an inflation of 4 percent in 2009 if the price of crude oil rises up to $150 per barrel. From there, forecasters, macroeconomists, financial market participants, and public policy makers always see oil price shock as an early warning because nearly all recession in post-World War II was accompanied by increase in oil price. An oil price shock is typically a large unexpected increase in the relative price of energy that affects the economic decisions of firms and households. In the short run, the price elasticity of the supply and demand for oil is very low because firms and consumers can not change their habits of consuming and alternative sources of energy is not immediately available. So it the elasticity of price will increase over long term. This change in price will be a great motivation for seeking new sources of crude oil,...

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