In this paper, Dr. Robert Wescott—former Chief Economist for the President’s Council of Economic Advisers—examines the effects of a significant oil price spike. He finds four separate ways in which such a spike would damage the U.S. economy:
Higher oil prices reduce the spending power of consumers and cause a reduction in demand for all of their spending categories.
Rising oil costs eat into companies’ profit margins when they are not able to pass these costs on to their customers, causing them to reduce services or cut production levels.
Higher oil prices will spark fears of a price-wage spiral, and will cause monetary authorities to tighten credit conditions.
Effects on Confidence and Financial Market Psychology
Higher oil prices hurt both consumer confidence and investor confidence.
A few short years later, when oil prices not only reached but surpassed $120 and the world plunged into recession, SAFE revisited this paper only to confirm that its predictions were eerily prescient.
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