The Anatomy of an Oil Price Shock

The price of a barrel of crude oil doubled within a few months last year. Although prices have been easing lately, for those who paid more than $3 for a gallon of gas, the memory is not likely to fade quickly. But worries about higher gas prices don’t end at the pump. Oil price shocks—sudden and sharp increases in the price of oil and its derivatives like gasoline—are associated in the popular mindset with an unavoid­ able descent into inflation. Ask just about anyone about the inflation of the 1970s, for example, and they’re likely to associate it with the oil crisis that occurred early in the decade.