David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

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1.1 Economic issues
fell substantially during the crisis. Expensive and non-essential goods also suffered. Demand for cars
fell and in many cases governments intervened by providing incentives to buy new cars to sustain
demand.
Looking at how things are produced, the crisis has created a reallocation of input resources used in
production. This reallocation has affected labour input most dramatically. Reduction in economic activity
implies a reduction in employment. The job market contracts and so more people become unemployed.
Moreover, finding jobs becomes even more difficult, causing unemployment to last longer.
Finally, the for whom question. As a result of the crisis the banking and financial sector suffered big losses.
The same happened to many investors because of the fall in stock values in financial markets. The fall in
the price of houses made first-time buyers better off, especially young people who could now buy a house
at a lower price. Discount supermarkets' sales figures also rose.
The oil price shocks
Oil provides fuel for heating, transport and machinery and is an input for petrochemicals and
household products ranging from plastic plates to polyester clothes. What happens if continuing
uncertainty in the Middle East or the ravages of climate change lead to very high oil prices? A little history
lesson is useful in thinking about the likely results.
Up to 1973 the use of oil increased steadily. It was cheap and abundant. In 1973 OPEC - the Organization of
Petroleum Exporting Countries ( www.opec.org) - organized a production cutback by its members, making
oil so scarce that its price tripled. Users could not quickly do without oil. Making oil scarce was very profitable
for OPEC members.
The figure below shows the real (inflation-adjusted) price of oil, measured in US dollars, from 1970 to 2009.
The price tripled between 1973 and 1977, doubled between 1979 and 1980, but then fell steadily until the midl
990s. Markets found ways to overcome the oil shortage that OPEC had created. High oil prices did not last
indefinitely. Given time, the higher price induced consumers to use less oil and non-OPEC producers to
sell more. These responses, guided by prices, are part of the way many societies determine what, how and for
whom to produce.
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120 End of Iranian hostage
crisis
100
80
60
40
20
Iranian Revolution:
OPEC cuts
production
Yorn Kippur war:
OPEC cuts
production
OPEC cartel
collapses
Start of second
war in Iraq
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70 73 76 79 82 85 88 91 94 97 00 03 06 09
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7