A Crude Strike
Subject Oil prices, Consumer demand for oil
Topic Aggregate Demand/Aggregate Supply, International Trade
Key Words Recession, Economic Growth, Consumer Demand
News Story

Internal strife in Venezuela, the world's fifth-largest oil exporter, sent oil prices to their highest levels in two months. The price for a barrel of crude oil for January delivery rose to over $30 a barrel on the New York Mercantile Exchange, an increase of 5.8 percent. Oil prices are now 50 percent higher than they were in January 2001. While economists are generally optimistic about economic growth for 2003, strikes and political unrest in Venezuela that lead to further oil price hikes may mitigate that optimism.
A strike at the state oil company, Petróleos de Venezuela, has brought oil production to a standstill. Exports have dropped from 2.7 million barrels per day to fewer than 500,000 barrels. Since Venezuela is the fourth largest supplier of oil to the United States, gasoline prices are expected to rise shortly, with further increases to follow.

Increased consumer demand and production cuts by OPEC had pushed crude oil supplies to low levels even before the strike. In response to the strike, OPEC has announced that it will increase its production, should the Venezuelan strike persist. Since neither side to the dispute in Venezuela appears ready to make concessions, some analysts believe that oil prices could rise to $35 in a week.

While $30 per barrel of oil would not throw the U.S. economy into recession, it would cause enough disruption to slow the recovery. Prices at $35 to $40 a barrel would be more problematic, and while the Venezuelan strike is not likely to result in $40 per barrel of oil, it could easily do so if war with Iraq would occur. It should be noted that oil price hikes have been the cause of two recessions: in 1973 and 1979.

The U.S. is already taking some measures to reduce the affect of the Venezuelan strike. The Energy Department will allow oil companies to delay promised shipments to the Strategic Petroleum Reserve (SPG) and there are requests that the Bush administration release oil from the SPG.

(Updated February 5, 2003)


How would an increase in the cost of imported oil and gasoline affect the aggregate supply curve? What would be the subsequent impact on real GDP and the aggregate price level?

2. The article states that the recent rise in the price of oil is partly attributable to the possibility of war with Iraq. What are oil traders afraid of? How would a war with Iraq affect the price of oil? Explain your answer.
3. If oil prices rise to $35-$40 a barrel, analysts fear that another recession might occur. What could policy makers do to prevent this from occurring?
Source Neela Banerjee, "Venezuela Strife Pushes Crude Oil to $30," The New York Times, December 17, 2002.

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