ices, inflation reports in the near future could be strong, pushing the twelve-month CPI rate up to 3 percent or more (Business Week, The McGraw-Hill Companies, Economic Outlook, March 6,2000). The question of whether to maintain the status quo or increase production remains in the hands of OPEC members. At present, Saudi Arabia and Iran appear to favor increasing production, but some other constituents want to extend the production cuts. OPEC is likely to announce specific production plans at its next meeting on March 27. In the meantime, oil prices have risen to more than $34 per barrel and growing concerns that a shortage of gasoline could arise this summer if OPEC does not pump more oil begin to circulate. In retrospect, the increase in crude oil prices over the last year is almost the same magnitude as the jump in oil prices going into the Gulf War (Oil and the Economy, “Will higher prices mean a recession?”, March 13,2000). Oil shocks—steep rises in oil prices, have preceded recessions in the US economy over the past 30 years. The most substantial shocks occurred in 1973-74, 1979-80 and 1991, and roughly correspond to the post-1970 recessions. Statistical data has shown a correlation between rising oil prices and diminishing GDP growth (Oil and the Economy, “Will higher prices mean a recession?”, March 13,2000). Based on historical experience, higher oil prices portend a reduction in economic activity to occur about a year after the price increase. According to this interpretation, if OPEC maintains its production cuts and oil prices, thus, continue to increase, the risk of an economic downturn will become greater. This analysis assumes that there is a causal relationship running from energy price increases to output declines. The causality, however, may be in reversed order. Growth tends to increase demand for energy, and hence higher GDP growth may push up oil prices. The effect of oil prices is not...
