The Impact of High Oil Prices on the Economy

Abstract

The rise in global oil prices observed since September 2010 results in part from the social and political instability in the Middle East and North African regions, and in part from longer-term trends reasserting themselves. The unrest sweeping Tunisia earlier this year spread over many surrounding nations, including some major oil producers, such as Algeria and, most significantly, Libya. The Middle East currently supplies about a third of world oil and possesses over half of the world's proven reserves. Clearly, instability in the region automatically raises worries of supply disruptions and possible oil shortage, stimulating speculation and driving world oil prices to new peaks. Speculators have a tendency to overshoot the impact of a supply shock, and in any case supply-driven spikes should remain temporary, fading away as political stability returns.