1990 oil price shock

The 1990 oil price spike occurred in response to the Iraqi invasion of Kuwait on August 2, 1990.[1] Lasting only 9 months, the price shock was less extreme and of shorter duration than the previous oil crises of 1973 and 1979-1980, yet the rise in prices is widely believed to have been a significant factor in the recession of the early 1990s.[2] Average monthly prices of oil rose from $17 per barrel in July to $36 per barrel in August.[3] As the U.S.-led coalition experienced military success against Iraqi forces, concerns about long-term supply shortages eased and prices began to fall.

Contents

Iraqi invasion of Kuwait and ensuing economic effects

On August 6, 1990, The Republic of Iraq invaded the State of Kuwait, leading to a 7-month occupation of Kuwait and an eventual U.S.-led military intervention. While Iraq officially claimed Kuwait was stealing its oil via slant drilling, its true motives are more complicated and less clear. At the time of the invasion, Iraq owed Kuwait $14 billion of outstanding debt that Kuwait had loaned it during the Iraq-Iran war. In addition, Iraq felt Kuwait was overproducing oil, lowering prices and hurting Iraqi oil profits in a time of financial stress.

In the buildup to the invasion, Iraq and Kuwait had been producing 4.3 million barrels (680,000 m3) of oil a day. This potential loss, coupled with threats to Saudi Arabian oil production, led to a rise in prices from $21 per barrel at the end of July to $28 per barrel on August 6. On the heels of the invasion, prices rose to a peak of $46 per barrel in mid-October.[3]

The United States’ rapid intervention and subsequent military success helped to mitigate the potential risk to future oil supplies, thereby calming the market and restoring confidence. After only three quarters, or 9 months, the spike had subsided.

U.S. Policy Response

The U.S. Federal Reserve’s monetary tightening in 1988 targeted the rapid inflation of the 1980s. By increasing the federal funds rate and lowering growth expectations, the Fed hoped to slow and eventually reduce inflationary pressures, creating greater price stability. The August 6 invasion was seen as a direct threat to the price stability the Fed sought. In fact, the Council of Economic Advisors published a consensus estimate that a one-year, 50 percent increase in the price of oil could temporarily raise the price level of the economy by 1 percent and potentially lower real output by the same amount.[3]

Despite the potential for inflation, the U.S. Fed and central banks around the globe decided it would not be necessary to raise interest rates to counteract the rise in oil prices. Rather, the U.S. Federal Reserve decided to maintain interest rates as if the oil price spike were not occurring. This decision to refrain from action stemmed from confidence in the future success of Desert Storm to protect major oil-producing facilities in the Middle East and a will to maintain the long-term credibility of economy policy that had been built up during the 1980s.[3]

To avoid being accused of inaction in the face of potential economic turbulence, the U.S. revised the Gramm-Rudman-Hollings Balanced Budget Act. Initially, the act prohibited the U.S. from changing budget deficit targets even in the event of a negative shock to the economy. When oil prices rose, revision of this act allowed the U.S. government to adjust its budget for changes in the economy, further mitigating the risk of rising prices. The result was a peak in prices at $46 per barrel in mid-October, followed by a steady decline in prices until 1994.[3]

See also

References

External links


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Oil Peak — Die Theorie des globalen Ölfördermaximums (englisch global oil peak) überträgt die Erkenntnisse zu einem Ölfördermaximum eines einzelnen Ölfeldes auf den gesamten Erdölvorrat der Erde. Die Frage, wann ein solches Maximum eintritt und ob es von… …   Deutsch Wikipedia

  • 1973 oil crisis — Further information: 1973 world oil market chronology 1973 Oil Crisis Other names Arab Oil Embargo The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC (consisting of the …   Wikipedia

  • 2007–2008 world food price crisis — The years 2007–2008 saw dramatic rises in world food prices, creating a global crisis and causing political and economical instability and social unrest in both poor and developed nations. Systemic causes for the world wide increases in food… …   Wikipedia

  • Peak-Oil — Die Theorie des globalen Ölfördermaximums (englisch global oil peak) überträgt die Erkenntnisse zu einem Ölfördermaximum eines einzelnen Ölfeldes auf den gesamten Erdölvorrat der Erde. Die Frage, wann ein solches Maximum eintritt und ob es von… …   Deutsch Wikipedia

  • Peak Oil — Die Theorie des globalen Ölfördermaximums (englisch global oil peak) überträgt die Erkenntnisse zu einem Ölfördermaximum eines einzelnen Ölfeldes auf den gesamten Erdölvorrat der Erde. Die Frage, wann ein solches Maximum eintritt und ob es von… …   Deutsch Wikipedia

  • Dow Jones Industrial Average — Recent logarithmic graph of the DJIA from Jan 2000 through Jul 2011 …   Wikipedia

  • Compressed air energy storage — Conceptual representation of the compressed air energy storage concept. Off peak (low cost) electrical power compresses air into an underground air storage “vessel” (the Norton mine), and later the air feeds a gas fired turbine generator complex… …   Wikipedia

  • Economy of Argentina — Infobox Economy country = Argentina width = 250 currency = Argentine Peso (ARS) year = Calendar year organs = WTO, Mercosur, Unasur rank = 23rd gdp = $523.7 billion (2007) [http://www.imf.org/external/pubs/ft/weo/2008/01/weodata/weorept.aspx?pr.x …   Wikipedia

  • British Caledonian in the 1970s — Articleissues cleanup= March 2008 copyedit = March 2008 confusing = March 2008 expert = Airlines essay = March 2008 peacock = March 2008 tone = March 2008 wikify = March 2008 context = March 2008 tooshort = March 2008 incomplete = March 2008This… …   Wikipedia

  • Economic relations of Japan — In its economic relations, Japan is both a major trading nation and one of the largest international investors in the world. In many respects, international trade is the lifeblood of Japan s economy. Imports and exports totaling the equivalent of …   Wikipedia


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.