Effects of Supply Shocks on U.S. Energy Prices

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Effects of Supply Shocks on U.S. Energy Prices
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The United States remains the big consumer of
world oil production.

• Main issuehow to maintain consistent supply of
  oil and natural gas (until alternatives arise)
• Oil pricesfluctuations from supply shocks
• 19702004 shows how oil prices fluctuate (next
  slide)

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Exogenous Oil Supply Shocks Since 1970From work
by Lutz Kilian, University of Michigan

• Date Political Event
• October 1973 Yom Kippur War/Arab Oil Embargo
• October 1978 Iranian Revolution
• September 1980 Iran-Iraq War
• August 1990 Persian Gulf War
• December 2002 Civil Unrest in Venezuela
• March 2003 Iraq War
• Exogenous here means that the shock to crude
  oil
• production is driven by political forces in
  oil-producing countries that
• evolve independently of the state of the global
  economy.

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Classic Short Term Supply Shock
Aggregate Supply
P2
P1
Aggregate Demand
Q2
Q1
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EnergyPrices and Effects

• Why such high oil and natural gas prices?
• Short-term supply effects of Hurricanes
• Katrina, Rita, and Wilma

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Short-Run Analysis

• Supply shock from Hurricanes Katrina, Rita
• Production and distribution some details
• Katrina hit the oil platforms.
• Rita hit the natural gas platforms.
• Refinery capacity was disrupted.
• Flows of oil and natural gas were disrupted.

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Power Outages Substation Damage
Source Entergy
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Power Outages Generating Stations Entergy
Patterson
Source Entergy
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What About the United States?

• U.S. production has peaked,
  but demand has not.
• Therefore, we are importing more energy from
  foreign countries.

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Lessons learned?

• Take actions to minimize the effect of those
  shocks on your budget.
• The silver lining of higher energy prices is more
  interest in alternative energy and renewable
  resources.
• People substitute other sources as fossil fuel
  prices increase.
• People conserve gas and energy.