Oil, economic growth and strategic petroleum stocks

Abstract

An examination of over 40 years of data reveals that oil price shocks are invariably followed by 2–3 years of weak economic growth and weak economic growth is almost always preceded by an oil price shock. This paper reviews why the price-inelastic demand and supply of oil cause oil price shocks and why oil price shocks reduce economic growth through dislocations of labor and capital. This paper also reviews the current state of oil-supply security noting that previous episodes of supply instability appear to have become chronic conditions. While new unconventional oil production technologies have revitalized North American oil production, there are significant barriers to a world-wide uptake of these technologies. Strategic petroleum stocks could provide a large measure of protection to the world economy during an oil supply disruption if they are used promptly and in sufficient volume to prevent large oil-price spikes. Despite the large volume of world-wide emergency reserves, their effectiveness in protecting world economies is not assured. Strategic oil stocks have not been used in sufficient quantity or soon enough to avoid the economic downturns that followed past oil supply outages. In addition, the growth of U.S. oil production has reduced the ability of the U.S. Strategic Petroleum Reserve to protect the economy following a future oil supply disruption. The policy implications of these findings are discussed.

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