Supply Shocks and Price Adjustment in the World Oil Market

R. Glenn Hubbard

The Quarterly Journal of Economics, 1986, vol. 101, issue 1, 85-102

Abstract: Understanding the impacts of transitory oil supply shocks on world oil prices is crucial to the evaluation of the economic impacts of shocks and the design of policy responses to address those impacts. This paper integrates short-run and long-run approaches to oil price determination, with particular emphasis on the "two-price" structure of the world oil market—with coexisting short-term "spot" prices and long-term "contract" prices. Even transitory shocks are shown to exhibit persistence effects on long-term prices. Some implications for econometric models of the relationship between spot and contract prices are discussed.

Date: 1986
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