Oil Supply Disruptions:

Their Price and Economic Effects

RCED-83-135: Published: May 20, 1983. Publicly Released: May 20, 1983.

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In response to a congressional request, GAO reported on oil prices and the economic effects of supply disruptions in the absence of government intervention. GAO also assessed the adequacy of research in this area.

GAO analysis showed that disruptions invariably raise oil prices. Models show that disruption size, market tightness, and the level of oil inventories govern the severity of oil price increases during disruptions, and the severity of disruption is the most important factor in determining price increases. The price increase in the 1979 Iranian oil disruption demonstrated that oil prices may increase steeply even if there is sufficient excess capacity to replace most of the lost production. In past disruptions, inventory accumulation exacerbated the shortage and prices increased. Drawing down the Strategic Petroleum Reserve can reduce prices somewhat. GAO found that consumer oil prices respond sluggishly to disruptions, peaking more than 6 months after the disruption's end. In addition, oil price shocks accompanying supply disruptions hurt the U.S. economy. There is a permanent, one-time loss in the gross national product, increased inflation, reduced economic growth during the disruption year and the year to follow, and a rise in unemployment. GAO found that government actions in the areas of market tightness and oil inventory could help moderate disruption-induced price increases. Finally, GAO found the need for additional research on: (1) the effects of large disruptions; (2) ways to reduce private stock buildup during disruptions; and (3) ways to minimize the economic costs of disruptions.

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