Economists have long been intrigued by empirical evidence that suggests that oil price shocks may be closely related to macroeconomic performance. This interest dates back to the 1970s. The 1970s were a period of growing dependence on imported oil, unprecedented disruptions in the global oil market and poor macroeconomic performance in the United States. Thus, it was natural to suspect a causal relationship from oil prices to U.S. macroeconomic aggregates. Since then, a large body of work has accumulated that purports to establish this link on theoretical grounds and to provide empirical evidence in its support. We do not attempt a comprehensive survey of this literature, but rather provide an idiosyncratic synthesis of what we view as the key issues in this debate and the insights gained over the last 30 years. The timing seems right for such an account. Although the experience of the 1970s continues to play an important role in discussions of the link between oil and the macroeconomy, there have been a number of new “oil price shocks” since the 1970s, notably the 1986 collapse of oil prices and the 2000 boom in oil prices as well as the oil price increases associated with the 1990-1991 Gulf war and the 2003 Iraq war. Given this richer case history, we are arguably in a better position than two decades ago to distinguish the idiosyncratic features of each oil crisis from the systematic effects.
