How do shortfalls in crude oil production
caused by wars and other political events in
the Middle East affect economic growth and inflation
in major industrialized countries? Public discussion
of this question has been shaped by the economic
experience of the 1970s and early 1980s. The
conventional wisdom leaves little doubt that oil
supply shocks abroad were to blame for the economic
malaise of the 1970s. This has led to the concern
that history might repeat itself if a new oil supply
shock were to occur, say in the form of a cutback
of Iranian oil production and exports, as
recently discussed in the media. Thus, understanding
the effects of such politically motivated shortfalls
in crude oil production is more important than
ever.a