Crude oil prices rose from $10.90 per barrel on March 10, 1999 to $33.92 per barrel exactly one year later. The price increase moved the issues of energy policy briefly from the back pages of the business section to the front page. However, the attention was brief. By early April, prices had declined by one-third and attention shifted to Microsoft, tax cuts, the election, and the stock market. Oil was quickly banished again from the public eye. No doubt, everyone hopes it will stay out of sight for another ten years.
The topic will return to the front pages soon, however, because the world may be confronted by a third oil shock. This third upset promises to be similar to but have a more modest economic impact than the two previous incidents, which occurred in 1973 and 1979. As in 1973 and 1979, the causes of this crisis will be a reduction in OPEC oil production and stagnation in non-OPEC production taking place at a time of rapid economic growth. As in 1973 and 1979, some oil producers can be expected to exercise market power to boost prices. As in 1973 and 1979, the price increases can be expected to slow economic growth, although the impact will be muted.
Still, the current episode could be very different from its earlier cousins because consuming nations now have the means to moderate its effect. Industrialized nations hold more than 1.2 billion barrels of strategic stocks, worth approximately $30 billion today. By lending these stocks to the market through policies identical to those employed by central banks, the G-7 countries can make the third oil shock a non-event and avoid any of the potential economic disruptions.