BPEA | Spring 2009

Causes and Consequences of the Oil Shock of 2007-08

James D. Hamilton
James D. Hamilton University of California, San Diego
discussants: Lutz Kilian
Lutz Kilian University of Michigan

Spring 2009

This paper explores similarities and differences between the
run-up of oil prices in 2007–08 and earlier oil price shocks, looking at what
caused these price increases and what effects they had on the economy.
Whereas previous oil price shocks were primarily caused by physical disruptions
of supply, the price run-up of 2007–08 was caused by strong demand
confronting stagnating world production. Although the causes were different,
the consequences for the economy appear to have been similar to those
observed in earlier episodes, with significant effects on consumption spending
and purchases of domestic automobiles in particular. Absent those declines, it
is unlikely that the period 2007Q4–2008Q3 would have been characterized as
one of recession for the United States. This episode should thus be added to
the list of U.S. recessions to which oil prices appear to have made a material