Oil price increase of 1990
Encyclopedia
The 1990 oil price spike occurred in response to the Iraqi invasion of Kuwait on August 2, 1990. Lasting only 9 months, the price shock was less extreme and of shorter duration than the previous oil crises of 1973
and 1979-1980
, yet the rise in prices is widely believed to have been a significant factor in the recession of the early 1990s. Average monthly prices of oil rose from $17 per barrel in July to $36 per barrel in August. As the U.S.
-led coalition experienced military success against Iraqi forces, concerns about long-term supply shortages eased and prices began to fall.
In the buildup to the invasion, Iraq and Kuwait had been producing 4.3 Moilbbl of oil a day. This potential loss, coupled with threats to Saudi Arabian oil production, led to a rise in prices from $21 per barrel at the end of July to $28 per barrel on August 6. On the heels of the invasion, prices rose to a peak of $46 per barrel in mid-October.
The United States’ rapid intervention and subsequent military success helped to mitigate the potential risk to future oil supplies, thereby calming the market and restoring confidence. After only three quarters, or 9 months, the spike had subsided.
Despite the potential for inflation, the U.S. Fed and central banks around the globe decided it would not be necessary to raise interest rates to counteract the rise in oil prices. Rather, the U.S. Federal Reserve decided to maintain interest rates as if the oil price spike were not occurring. This decision to refrain from action stemmed from confidence in the future success of Desert Storm to protect major oil-producing facilities in the Middle East
and a will to maintain the long-term credibility of economy policy that had been built up during the 1980s.
To avoid being accused of inaction in the face of potential economic turbulence, the U.S. revised the Gramm-Rudman-Hollings Balanced Budget Act
. Initially, the act prohibited the U.S. from changing budget deficit targets even in the event of a negative shock to the economy. When oil prices rose, revision of this act allowed the U.S. government to adjust its budget for changes in the economy, further mitigating the risk of rising prices. The result was a peak in prices at $46 per barrel in mid-October, followed by a steady decline in prices until 1994.
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
and 1979-1980
1979 energy crisis
The 1979 oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil...
, yet the rise in prices is widely believed to have been a significant factor in the recession of the early 1990s. Average monthly prices of oil rose from $17 per barrel in July to $36 per barrel in August. As the U.S.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
-led coalition experienced military success against Iraqi forces, concerns about long-term supply shortages eased and prices began to fall.
Iraqi invasion of Kuwait and ensuing economic effects
On August 6, 1990, The Republic of Iraq invaded the State of Kuwait, leading to a 7-month occupation of Kuwait and an eventual U.S.-led military intervention. While Iraq officially claimed Kuwait was stealing its oil via slant drilling, its true motives are more complicated and less clear. At the time of the invasion, Iraq owed Kuwait $14 billion of outstanding debt that Kuwait had loaned it during the Iraq-Iran war. In addition, Iraq felt Kuwait was overproducing oil, lowering prices and hurting Iraqi oil profits in a time of financial stress.In the buildup to the invasion, Iraq and Kuwait had been producing 4.3 Moilbbl of oil a day. This potential loss, coupled with threats to Saudi Arabian oil production, led to a rise in prices from $21 per barrel at the end of July to $28 per barrel on August 6. On the heels of the invasion, prices rose to a peak of $46 per barrel in mid-October.
The United States’ rapid intervention and subsequent military success helped to mitigate the potential risk to future oil supplies, thereby calming the market and restoring confidence. After only three quarters, or 9 months, the spike had subsided.
U.S. Policy Response
The U.S. Federal Reserve’s monetary tightening in 1988 targeted the rapid inflation of the 1980s. By increasing the federal funds rate and lowering growth expectations, the Fed hoped to slow and eventually reduce inflationary pressures, creating greater price stability. The August 6 invasion was seen as a direct threat to the price stability the Fed sought. In fact, the Council of Economic Advisors published a consensus estimate that a one-year, 50 percent increase in the price of oil could temporarily raise the price level of the economy by 1 percent and potentially lower real output by the same amount.Despite the potential for inflation, the U.S. Fed and central banks around the globe decided it would not be necessary to raise interest rates to counteract the rise in oil prices. Rather, the U.S. Federal Reserve decided to maintain interest rates as if the oil price spike were not occurring. This decision to refrain from action stemmed from confidence in the future success of Desert Storm to protect major oil-producing facilities in the Middle East
Middle East
The Middle East is a region that encompasses Western Asia and Northern Africa. It is often used as a synonym for Near East, in opposition to Far East...
and a will to maintain the long-term credibility of economy policy that had been built up during the 1980s.
To avoid being accused of inaction in the face of potential economic turbulence, the U.S. revised the Gramm-Rudman-Hollings Balanced Budget Act
Gramm-Rudman-Hollings Balanced Budget Act
The Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985 and Budget and Emergency Deficit Control Reaffirmation Act of 1987 were, according to U.S...
. Initially, the act prohibited the U.S. from changing budget deficit targets even in the event of a negative shock to the economy. When oil prices rose, revision of this act allowed the U.S. government to adjust its budget for changes in the economy, further mitigating the risk of rising prices. The result was a peak in prices at $46 per barrel in mid-October, followed by a steady decline in prices until 1994.
See also
- Energy conservationEnergy conservationEnergy conservation refers to efforts made to reduce energy consumption. Energy conservation can be achieved through increased efficient energy use, in conjunction with decreased energy consumption and/or reduced consumption from conventional energy sources...
- Energy crisisEnergy crisisAn energy crisis is any great bottleneck in the supply of energy resources to an economy. In popular literature though, it often refers to one of the energy sources used at a certain time and place, particularly those that supply national electricity grids or serve as fuel for vehicles...
- 1973 energy crisis
- 1979 energy crisis1979 energy crisisThe 1979 oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil...
- Oil price increases since 2003
- Peak oilPeak oilPeak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. This concept is based on the observed production rates of individual oil wells, projected reserves and the combined production rate of a field...