Clint Smith
Research Analyst, Economics and Industry Team
Parliamentary Library
The world may be entering an era defined by relatively short periods of economic growth terminating in oil price spikes and recession.
New Zealand is not immune to the consequences of this situation. In fact, its dependency on
bulk exports and tourism makes New Zealand very vulnerable to oil shocks.
This paper explores similarities and differences between the run‐up of oil prices in 2007‐08 and earlier oil price shocks, looking at what caused the price increase and what effects it had on the economy. Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run‐up of 2007‐08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. In the absence of those declines, it is unlikely that we would have characterized the period 2007:Q4 to 2008:Q3 as one of economic recession for the U.S. The experience of 2007‐08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.
