WIT Press

Typology Of Oil Shocks: Why 2004 Is Different


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WIT Press


J.-L. Bertrand & S. Justeau


A sudden increase in the price of oil is unavoidably associated with the word \“shock”. Considerable research has shown that an increase in the price of oil reduces output and boosts inflation. This is evidently true for the previous oil crises, but when it comes to the recent upturn in the price of oil, inflation remains under control in developed countries and the world surprisingly continues to grow at a highly respectable pace. The same cause no longer leads to the same consequences. Since very few papers have defined what the main characteristics of a true shock are, it has therefore become of key importance to step back and analyse previous oil crises to better understand the current situation and evaluate what is likely to happen in the coming years. The first section of this paper reviews previous oil crises to establish a grid of characteristics and determine whether the recent upturn in oil markets can be viewed as a genuine oil shock. We will observe that 2004 is evidently different from previous oil shocks. In the second section we will try to understand why today the world does not behave as economics tell us. We will evidence the decreased level of dependency of major economies to oil and show using a VAR model that a redistribution of wealth is in fact offsetting the classic shortfalls of past oil shocks. Keywords: oil shock, economics of exhaustible resource, oil proceeds redistribution 1 Introduction Oil has increasingly been a focus of attention since 2004. The price of the West Texas Intermediate (WTI) which is a type of crude oil commonly used as


oil shock, economics of exhaustible resource, oil proceeds redistribution