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Energy Prices and the U.S. Business Cycle

William Poole*
President, Federal Reserve Bank of St. Louis

Global Interdependence Center (GIC) Abroad in Chile Conference
American Chamber of Commerce in Chile Breakfast
Santiago, Chile
March 2, 2007

*I appreciate comments provided by my colleagues at the Federal Reserve Bank of St. Louis. Edward Nelson, assistant vice president, provided special assistance. I take full responsibility for errors. The views expressed are mine and do not necessarily reflect official positions of the Federal Reserve System.

Energy Prices and the U.S. Business Cycle

A staple of the macroeconomics literature is that energy price shocks have been an important contributor to U.S. recessions. The situation is clearly more complicated than the common macro textbook exercise of using standard diagrams to work out the effects of an energy shock. Recent experience with a near tripling of oil prices from mid 2003 to mid 2006 without a recession suggests the need to review the conventional wisdom. One of my messages will be that the conventional wisdom fails to consider the fact that previous oil price shocks occurred when the U.S. economy was already suffering from substantial inflation pressures, whereas the recent run-up of oil prices has occurred in an economy with substantial overall price stability and entrenched, low inflation expectations.

Before I dig into the issue of the extent of causality between oil price shocks and recessions, I want to emphasize that the views I express here are mine and do not necessarily reflect official positions of the Federal Reserve System. I thank my colleagues at the Federal Reserve Bank of St. Louis for their comments; Ed Nelson, asistant vice president, provided special assistance. However, I retain full responsibility for errors.
The Debate

The historical record since 1970 provides some perspective on the relationship between oil prices and the business cycle. The figure (at end of text) plots the U.S. benchmark oil price (the West Texas intermediate spot price), both in nominal terms (i.e., current U.S. dollars) and real terms (i.e., deflated by the CPI so as to be in constant 1982-84 dollars) since 1970. Shaded regions denote U.S. recessions, as designated by the National Bureau of Economic Research. These include the recession of 1973-75, associated with the oil price shock of 1973-74, the recessions of 1980 and 1981-82, preceded by the second oil shock in 1979, and the recession of 1990-91, also associated with a large, but more transitory, oil price increase of about 75 percent in 1990-91. There are also more drawn-out but steep oil increases in 1999-2000 and 2003-2006. The presence of the recession bars in the graph brings out what Hamilton and Herrera (2004, p. 265) observe is “a correlation between increases in oil prices and subsequent economic downturns.” In particular, recessions began in the United States within a year of the 1973, 1979 and 1990 oil price increases.

There has been much debate on how much of this link between recessions and prior oil price increases should be attributed to the powerful effect of oil shocks on the economy, and how much reflects a third factor—more restrictive monetary policy imposed at roughly the same time as the oil shocks. But I would draw attention to another aspect of the relationship between the business cycle and oil prices highlighted by the figure. The United States has never had an energy price spike occur in the middle of a recession, or immediately following a recession when unemployment is still relatively high. This fact suggests two properties of large oil price increases that are useful to keep in mind. First, very sharp increases in oil prices that we have observed historically, while undoubtedly reflecting exogenous supply disruptions to some degree, also reflect the strength of the economy at the time. Secondly, the casual association often made, based on the 1970s experience, between oil price increases and high inflation, is largely misguided because the large oil price increases of the 1970s occurred against the background of cyclical expansions that had gone too far.

The 1973 and 1979 episodes did not feature inflationary spirals triggered by the oil shocks. Instead, they are characterized by preexisting, general inflationary pressures that an alternative monetary policy could have avoided. The first oil shock in 1973 occurred against a background of clear economic overheating in the United States. U.S. monetary policy was very expansionary in 1971 and 1972, leading to excessive growth of aggregate demand that, even in the presence of price controls, spilled over into rising inflation in 1973. By October 1973—that is, the month of the first oil shock, but largely before its impact could be felt in the CPI—inflation had reached 8.1 percent on a 12-month basis, a sharp rise from the 3.2 percent rate over the 12 months ending in October 1972. Annual CPI inflation subsequently rose to 11.8 percent in October 1974 and peaked at 12.2 percent in November 1974.

Similarly, in the wake of several years of expanding demand, inflation rose throughout most of 1977 and 1978, well before the second oil shock, and the 12-month rate stood at 9.3 percent in January 1979, 2.5 percentage points above its value of January 1978. Inflation subsequently peaked at 14.6 percent in March 1980. Even the 1990 oil price spike occurred late in a long economic expansion, with annual inflation having stood above 4 percent since mid-1988. In July 1990, the 12-month CPI inflation rate was 4.8 percent, too high to correspond to price stability and not far below the July 1989 value of 5.1 percent. Following the oil shock that began in August 1990, inflation peaked at 6.4 percent in October 1990.

The strength of the economy at the time of the three oil shocks is also reflected in the unemployment rate. In October 1973, the seasonally adjusted U.S. unemployment rate stood at 4.6 percent, its lowest rate since early 1970; in January 1979 it was 5.9 percent, close to its trough for the late 1970s expansion; and in July 1990, unemployment was 5.5 percent, above its March 1989 low of 5.0 percent, but still lower than its value in any month in the years 1975-1987.

This emphasis on the link between the state of the business cycle and the strength of oil prices may seem surprising. Many of the well-known spikes in the oil price are associated with exogenous events on the supply side: for example, OPEC’s quadrupling of the oil price in late 1973 in the wake of the Middle East war; OPEC’s doubling of the oil price in 1979 following the revolution in Iran; and Iraq’s invasion of Kuwait in 1990. These events were certainly major supply-side disruptions. But even a cartel like OPEC that administers the price of its product cannot ignore market conditions. In particular, a reason why OPEC was able to sustain the very large 1973 oil price increase for so long was because world demand for oil was underpinned by rapid expansion of aggregate demand in key markets in Europe, Japan and the United States. Indeed, some analysts of the 1973 oil shock have cast doubt on whether the oil price increase of 1973 can be considered an exogenous event at all; Barsky and Kilian (2001) argue that it was a delayed response to long-term demand developments in the oil market, combined with a response to contemporaneous buoyant world demand conditions.(1) We do not have to go this far, however, to recognize that there was a significant endogenous component to the oil price increases in 1973 and 1979 due to demand factors, reflecting an overheating of the U.S. economy which coincided with boom conditions in other advanced economies.
Oil Prices and Inflation

Members of the FOMC, as well as monetary policy makers in Europe and the United Kingdom, have spoken about oil prices and inflation on many occasions in recent years. Despite differences in emphasis, a clear proposition runs through these discussions: Irrespective of the behavior of oil prices, we can be confident that monetary policy oriented to price stability will deliver control over inflation over the medium term. It is worth spelling out this proposition in some detail.

The reason why price stability is not contingent on oil price behavior is that inflation is a sustained rise in the general level of prices. The price of oil enters heavily into a particular category of consumer prices—gasoline prices—and indirectly into the prices of many other products. It is possible for the price of energy-intensive goods to change relative to a general index of prices; in fact, such relative-price movements are part of the everyday workings of a market economy. And, over periods of, say, a year or more it is possible for monetary policy to secure low inflation—which means low growth rates in indexes of overall prices—even when energy price inflation is high. Over time, the general level of prices responds to the supply-demand imbalance in the economy: that is, to longer-term movement in total spending in the economy relative to long-run supply potential. Monetary policy actions affect the total volume of spending, and so can influence the balance between aggregate demand and supply. By keeping aggregate demand in balance with aggregate supply, monetary policy can create conditions for general price stability, even if certain components in the price index are persistently increasing.

Two aspects of this picture are worth emphasizing. First, the overall price level is susceptible to influence by monetary policy even if the price of oil, or other commodities, is being driven by exogenous supply events. That is why Milton Friedman could advance his proposition that “inflation is always and everywhere a monetary phenomenon” even though he acknowledged that the 1973 OPEC shock had produced a “drastic alteration in the conditions of supply of crude oil.”(2) The general trend of prices is distinct from the behavior of a single price in the index or subset of the index. Inflation is always an endogenous variable in the medium term, whatever exogenous shocks are affecting its components in the short term.

Secondly, monetary policymakers often pay attention to “core” measures of prices that exclude energy and food prices. This focus does not, however, mean that policymakers’ concept of price stability refers only to a basket of goods that excludes energy-intensive items. The overall cost of living is what matters for welfare, so stability over time in indexes that include energy is desirable. But because the price of gasoline is volatile, it is often desirable to “see through” very short-term movements in consumer prices, and work out what is happening to the underlying trend of prices. Looking at core measures of inflation can be useful for this purpose. Indeed core and aggregate inflation clearly move together over longer periods. That said, during periods of sustained increases in relative energy prices, general price stability requires that price indexes that exclude energy will need to grow more slowly than the aggregate price index; over this period, achievement of inflation at a desirable level means that core inflation, on average, proceeds below the overall level of inflation.

Thirdly, an oil price increase may reduce aggregate supply and policymakers also need to take this fact into account in keeping demand and supply in balance. This issue is most prominent when the oil price change is permanent and when the economy’s technology is very energy-intensive on average. The 1973 oil shock, for example, was long-lasting and took place at a time when U.S. production was very energy-inefficient. Potential output thus fell substantially. The economy was already overheated by 1973; so, some reining in of spending by monetary policy was justified even before the oil shock; but once the oil shock took place, monetary policy needed to tighten, just to keep supply and demand from going further into imbalance. That is, it was necessary to let actual output fall with the decline in potential output. From this perspective, Hamilton and Herrera (2004) are not necessarily posing the right question when they ask how much of a monetary policy loosening would have been required to avoid a recession after the 1973 oil shock. The supply shock alone justified a monetary policy tightening on stabilization grounds.

In recent years, on the other hand, the circumstances of the 1973 oil shock have not been repeated. The economy has not been overheated; the economy is more energy-efficient so the impact on supply of oil shocks has been moderated; and the more severe spikes in the oil price such as in summer 2006 have been recognized as transitory in nature. In these circumstances, monetary policy is in a much better position to support aggregate demand in the face of oil shocks without endangering medium-term price stability. This state of affairs has been emphasized by the Federal Reserve Chairman in his discussion of the effect of oil shocks (Bernanke, 2006).

In summary, maintenance of low inflation over a period of several years or more is achievable whatever happens to oil prices. The same was true in the 1970s, and the fact that inflation was high on average reflected over-expansionary monetary policy, not the oil shocks.
Recent Oil Price Increases

The oil price increase in 2003-2006 is in line with the earlier pattern that surges in oil prices occur during economic expansions. Indeed, recent increases are more clearly a demand phenomenon than the previous increases. Energy prices in recent years have been driven by demand rather than supply. The source of this demand is unusual compared to the past, with a smaller contribution of U.S. demand and a much larger contribution of China. China’s net imports of oil were projected to be 2.3 percent of its GDP in 2006 compared to 0.9 percent in 2002 (IMF, 2006, p. 31). A longer-term perspective is given by the fact that China’s share of world demand for oil is estimated to have risen from 3.5 percent in 1990 to around 8.2 percent in 2006 (Weber, 2006). This increase reflects the rapid growth and industrialization of China in the past fifteen years, as well as the use of production technology that is, on average, energy-inefficient compared to the United States.
Conclusions

Without question, energy supply shocks are disruptive, but they need not create recessions. Indeed, there is a more general lesson from experience with oil price shocks. Monetary policy should not allow an economy to operate at the edge of a cliff. When balanced precariously at the edge of a cliff, even a minor disturbance, oil or otherwise, may be sufficient to push the economy over the edge. Although an outside shock may be the catalyst, or trigger, that creates undue inflation pressures, the fundamental problem is not the catalyst but the powerful and risky brew of an overheated economy. To use another analogy, if someone opens gas jets and fills a house with gas, do we blame the explosion on the person who lights the match or the person who opened the jets? I know where I want to place the blame.


Footnotes

1. See Hamilton (2003, pp. 388-89) for a rebuttal of Barsky and Kilian’s (2001) position that the 1973-74 oil price increase did not incorporate a major exogenous supply shift.

2. Friedman and Schwartz (1982, p. 414).


References

Barsky, Robert B., and Lutz Kilian (2001). “Do We Really Know That Oil Caused the Great Stagflation? A Monetary Alternative,” NBER Macroeconomics Annual, Vol. 16(1), 137-183.

Bernanke, Ben S. (2006). “Energy and the Economy.” Remarks before the Economic Club of Chicago, Chicago, Illinois, June 15.

Friedman, Milton, and Anna J. Schwartz (1982). Monetary Trends in the United States and the United Kingdom. Chicago: University of Chicago Press.

Hamilton, James D. (2003). “What Is an Oil Shock?,” Journal of Econometrics, Vol. 113(2), 363-398.

Hamilton, James D., and Ana Maria Herrera (2004). “Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy,” Journal of Money, Credit and Banking, Vol. 36(2), 265-286.

International Monetary Fund (2006). People’s Republic of China—Article IV Consultation: Staff Report. Washington, D.C.

Weber, Axel A. (2006). “Oil Price Shocks and Monetary Policy in the Euro Area.” Whitaker Lecture by President of the Deutsche Bundesbank.


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프로야구 삼성, 12년 만에 한국시리즈 우승 *AI를 활용해 정리한 경기 내용입니다. 상단의 'AI MY 뉴스' 로그인을 통해 뉴스핌의 차세대 AI 콘텐츠 서비스를 활용해보기 바랍니다. [서울=뉴스핌] 유다연 기자=12년의 기다림이 끝났다. 삼성이 정규시즌 1위 KT 위즈를 꺾고 2014년 이후 12년 만에 한국시리즈(KS·7전 4선승제) 정상에 복귀했다. 삼성은 8일 대구삼성라이온즈파크에서 열린 KT와의 2026 KBO KS 5차전에서 12-1로 대승을 거뒀다. [서울=뉴스핌] 유다연 기자= 삼성 라이온즈가 8일 대구 삼성라이온즈파크에서 열린 2026 KBO 한국시리즈 5차전에서 12-1로 이겼다. 이날 우승으로 삼성은 12년 만에 KS 정상자리에 올랐다. 그래픽은 독자의 이해를 돕기 위해 삼성 선수들 사진과 함께 만든 AI그래픽. (명령어: 삼성 라이온즈 12년 만의 우승을 AI그래픽으로 제작해줘.)[사진=삼성 라이온즈][그래픽=챗 GPT] 2026.11.08 willowdy@newspim.com 지난 3일 수원에서 열린 1차전에서 7-8로 패했던 삼성은 2차전 연장 12회 혈투 끝에 승리하며 시리즈 균형을 맞췄다. 이후 안방에서 열린 3~5차전을 모두 쓸어 담으며 시리즈 전적 4승 1패로 우승을 확정했다. 이로써 삼성은 2002년, 2005년, 2006년, 2011~2014년에 이어 통산 8번째 KS 우승을 차지했다. 1985년 전·후기 통합우승까지 포함하면 구단 통산 9번째 우승이다. 특히 정규시즌 2위였던 삼성은 1위 KT를 제압하면서 2018년 SK(현 SSG) 이후 8년 만에 '업셋 우승'을 달성했다. 반면 KT는 2021년 창단 첫 통합우승 이후 5년 만에 두 번째 통합우승을 노렸으나 삼성의 기세를 넘지 못했다. 삼성의 주장 구자욱은 KS 최우수선수(MVP)에 선정되며 우승의 기쁨을 더했다. [서울=뉴스핌] 삼성 구자욱이 8일 대구 삼성 라이온즈파크에서 열린 KT와 2026 KBO 한국시리즈 5차전 득점을 기록해 포효하고 있다. [사진=삼성 라이온즈] 2026.11.08 willowdy@newspim.com 이날 선취점은 KT의 몫이었다. KT는 2회초 1사 1, 2루 기회를 놓쳤지만 3회초 선제점을 뽑아냈다. 선두타자 한승택이 유격수를 맞고 외야로 빠져나가는 안타로 출루했고, 권동진의 좌중간 안타와 최원준의 희생번트를 묶어 1사 2, 3루 기회를 잡았다. 이어 장진혁이 중견수 희생플라이를 날려 1-0으로 앞서갔다. 하지만 삼성은 곧바로 승부를 뒤집었다. 3회말 1사 후 김지찬이 스트레이트 볼넷으로 출루했다. 2사 후 타석에 들어선 구자욱이 우익선상 1타점 2루타를 터뜨리며 1-1 동점을 만들었다. 이어 르윈 디아즈가 오른쪽 담장을 직격하는 1타점 적시타를 날려 2-1로 역전했다. 계속된 공격에서 최형우의 우전 안타로 기회를 이어간 삼성은 김영웅의 좌중간 적시타까지 터지면서 3-1로 달아났다. 디아즈의 적시타는 이날 결승타가 됐다. KT는 4회초 1사 2루, 5회초 1사 1, 2루 기회를 잡았지만 후속타 불발로 추격에 실패했다. 위기를 넘긴 삼성은 5회말 타선이 폭발하며 사실상 승부를 결정지었다. 삼성은 5회말 박승규가 상대 유격수의 포구 실책으로 출루하며 공격의 물꼬를 텄다. 이후 구자욱의 우전 안타로 1사 1, 2루 기회를 잡았다. 디아즈가 3루수 뜬공으로 물러났지만 최형우가 우익선상 1타점 적시타를 날리며 4-1로 달아났다. 이어 김영웅의 타구가 상대 2루수의 몸을 맞고 굴절되면서 내야안타가 됐고, 2루 주자 구자욱이 홈을 밟아 5-1을 만들었다. [서울=뉴스핌] 삼성 강민호가 8일 대구 삼성라이온즈파크에서 열린 KT와 2026 KBO KS 5차전에서 적시타를 기록 후 환호하고 있다. [사진=삼성 라이온즈] 2026.11.08 willowdy@newspim.com 삼성의 공세는 멈추지 않았다. 이재현이 좌익선상 1타점 2루타를 터뜨리며 점수 차를 5점으로 벌렸다. KT는 류지혁을 자동 고의4구로 내보내며 만루 작전을 선택했다. 그러나 수비 실책이 뼈아팠다. 강민호가 2루수 앞으로 병살타성 땅볼을 쳤지만 KT의 2루수와 유격수 사이에서 송구와 포구가 제대로 이뤄지지 않았다. 그 사이 주자 2명이 홈을 밟으며 점수는 8-1까지 벌어졌다. 기세가 오른 삼성은 계속된 1, 3루에서 김지찬이 우중간을 가르는 2타점 3루타를 터뜨려 두 자릿수 득점을 완성했다. 이어 상대 투수 손동현의 폭투로 1점을 추가했다. 삼성은 5회말에만 8점을 몰아치며 11-1로 달아났다. 반면 KT는 연이은 수비 실책과 마운드 붕괴로 추격 동력을 잃었다. 삼성은 8회말에도 추가점을 뽑았다. 박승규의 투수 오른쪽 내야안타와 구자욱의 중전 안타로 만든 1사 1, 3루에서 김영웅의 타구가 유격수 권동진의 몸을 맞고 외야로 빠져나가면서 12-1을 만들었다. 이 과정에서 타구에 맞은 권동진은 구급차로 이송됐다. 마운드에서는 선발 원태인과 크리스 페덱이 KT 타선을 1점으로 묶으며 우승을 합작했다. [서울=뉴스핌] 삼성 원태인과 강민호가 8일 대구 삼성 라이온즈파크에서 열린 2026 KBO KS 5차전에서 마운드를 내려오며 대화하고 있다. [사진=삼성 라이온즈] 2026.11.08 willowdy@newspim.com 원태인은 5이닝 동안 4피안타 2사사구 5탈삼진 1실점을 기록하며 승리투수가 됐다. 3회 선취점을 허용했지만 추가 실점 없이 5회까지 마운드를 지키며 팀의 역전승에 발판을 마련했다. 삼성은 6회부터 선발 자원인 페덱을 투입하며 굳히기에 나섰다. 페덱은 4이닝 동안 안타와 사사구를 단 한 개도 허용하지 않는 퍼펙트 투구를 펼쳤다. 탈삼진 4개를 곁들이며 KT의 반격을 원천 봉쇄하고 우승을 확정했다. 반면 KT 선발 데이비스 대니엘은 3이닝 5피안타 2사사구 4탈삼진 3실점으로 패전투수가 됐다. 뒤이어 등판한 고영표도 1.1이닝 5피안타 1사사구 1탈삼진 8실점(2자책점)으로 무너지면서 팀의 패배를 막지 못했다. 정규시즌 1위로 KS에 직행했던 KT는 1차전 승리 이후 4연패를 당하며 안방에서 우승 트로피를 들어 올리겠다는 목표를 이루지 못했다. 반면 정규시즌 2위로 플레이오프부터 가을야구를 시작한 삼성은 KIA를 꺾고 KS에 진출한 데 이어 KT까지 제압했다. 12년 만에 다시 정상에 오른 삼성은 대구 홈팬들 앞에서 통산 9번째 우승의 기쁨을 만끽했다. *위 내용은 생성형 AI로 작성한 경기 상보 [명령어 : 11월 8일 대구 KT-삼성 KS 5차전 경기 내용을 정리해줘=CHAT GPT] willowdy@newspim.com 2026-11-08 17:21
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엔비디아 '젠슨 황 장녀' 방한 돌연 취소? [서울=뉴스핌] 백승은 기자 = 젠슨 황 엔비디아 최고경영자(CEO)의 장녀 매디슨 황 엔비디아 수석이사가 한국 방문 계획을 돌연 취소했다. 9일 IT업계에 따르면 매디슨 황 엔비디아 옴니버스·로보틱스 제품 마케팅 수석이사는 방한 일정을 취소했다. 단 구체적인 사유는 공개되지 않았다. 지난 8월 LG 데이터팩토리를 방문한 매디슨 황 엔비디아 수석이사 [사진=뉴스핌DB] 이번 방한은 9~10일 열리는 '엔비디아 AI 데이 서울 2026' 행사에 참석하기 위함이었다. 그렇지만 방한 일정이 취소되며 배경훈 부총리 겸 과학기술정보통신부 장관과의 면담 등 국내 주요 일정이 모두 무산됐다. 단 행사는 예정대로 진행된다. 국내 기업 협력 행사에는 엔비디아의 다른 임원이 대신 참석할 예정이다. 업계에서는 젠슨 황 CEO 주변 인물의 '중국 스파이' 연루 의혹이 방한 취소에 영향을 미친 게 아니냐는 관측이 제기된다.  100wins@newspim.com 2026-11-08 11:39
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