Society of Petroleum Engineers 6200 North Central Expressway Dallas, Texas 75206


American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc.


There is no question that the increase in crude-oil prices, as viewed by oil importers, is a cost-push phenomenon: it involves the displacement of the importing nation's aggregate supply curve. Whatever the economic impact of increased crude oil prices in importing nations, the use of demand management policies cannot successfully counteract what is in effect a supply problem.

Yet, based on the results of a study involving an econometric model, U. S. government officials maintain that

  • the price/employment impact of the 1973/74 increase in crude oil prices was very substantial and long-lasting (at least until 1980), and

  • demand management policies can be used to soften that impact on both the price-level and unemployment fronts.

No matter how complicated the mathematics of the argument, the results of this econometric study are inconsistent with observed market behavior and with economic theory. This suggests, of course, that the econometric model itself is wrong. It is the purpose of this paper to implant an awareness in the paper to implant an awareness in the reader's mind concerning the limitations of econometric models.


One would think that the question of the inflationary impact of rising crude oil prices has now been put to rest, since most economists who have seriously looked into the problem have come up with essentially the same answer—a rare phenomenon for this breed of people who phenomenon for this breed of people who (according to Bernard Shaw), if laid end to end, will reach no conclusion. It is generally agreed that the inflationary impact of rising crude-oil prices, assuming no changes in the money supply, has been a one-time increase in the U. S. GNP deflator on the order of two to three percent. This has been discussed repeatedly percent. This has been discussed repeatedly by this author. Nobel-Prize Winner Milton Friedman has been quoted as saying that "inflations are made at home by governments, and governments found it convenient to blame the oil crisis for their troubles." Harvard 's Professor Haberler has expressed similar thoughts, as have the OECD and countless others.

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