The impact of oil price change on USs economy Research Paper

The impact of oil price change on USs economy - Research Paper Example An increase of 54% in the prices of crude oil in 2011 would lead to a double recession in the U.S. This paper aims at examining how shocks of oil prices in the past have impacted the U.S. economy, and makes predictions on how the economy will do in light of the recent oil prices. Using the methodology of forecasting from Hamilton (2008) with time analysis, the paper will use the impulse response functions from the prices of oil to predict the response of GDP. The literature review will be used to describe how oil is an integral part of the economy, and how recessions and oil shocks have coincided ever since World War II. The paper will point out the disagreements in the literature about the impacts of oil shocks on the U.S. economy as well as the asymmetry of price increases and price decreases. According to Hamilton (2010) when an embargo on oil was instituted by the Organization of Petroleum Exporting Countries (OPEC) the global supply of oil fell by 7.5%. The 1973 oil crisis effects were far reaching. According to Forrester (1984), the U.S set the target of reducing the consumption of oil by 25% at that time led by Richard Nixon. A country wide speed limit of 55 miles per hour was temporarily passed by the congress, and this continues until 1988 (Frum, 2010). The use of Christmas trees was banned in Oregon State (Frum, 2010). Many gas stations in the U.S were shut down as a result of insufficient oil supply, as many other gas stations rationed the gasoline supply (Hamilton, 2010). The American lifestyle was threatened by the Middle East instability which had a huge effect on the American people (Dahl, 2003). As a result of the political turmoil in Libya in 2011, the prices of crude oil went up to two and a half year high. As the issue was addressed by the U.S president, it became clear that, the U.S used 7% less oil in 2011 than in 2005, but still depends on the foreign oil. According to the U.S. imports over 55% of crude oil from outside.