The oil price shock 1990 occurred in response to Iraq's invasion of Kuwait on August 2, 1990, Saddam Hussein's second invasion of fellow OPEC members. Lasted just nine months, the price spike was less extreme and the duration was shorter than the previous oil crisis of 1973-1974 and 1979-1980, but the surge still contributed to the recession of the early 1990s. Average oil prices per month rose from $ 17 a barrel in July to $ 36 a barrel in October. When the US-led coalition experiences military successes against Iraqi forces, worries about long-term supply shortages ease and prices begin to fall.
Video 1990 oil price shock
Iraqi invasion of Kuwait and subsequent economic effects
On August 2, 1990, the Iraqi Republic invaded the Kuwaiti State, leading to the 7-month occupation of Kuwait and the US-led military intervention. While Iraq officially claims Kuwait steals its oil through oblique drilling, the motive is actually more complicated and less clear. At the time of the invasion, Iraq owed Kuwait $ 14 billion of the overwhelming debt that Kuwait had lent to it during the 1980-1988 Iran-Iraq War. In addition, Iraq feels Kuwait overproduces oil, lowering prices and hurting Iraq's oil profits in times of financial stress.
In the buildup to the invasion, Iraq and Kuwait have produced a combined 4.3 million barrels (680,000 m 3 ) of oil per day. This potential loss of supply, coupled with threats to Saudi Arabia's oil production, led to a rise in prices from $ 21 per barrel by the end of July to $ 28 per barrel on Aug. 6. On the heels of the invasion, prices rose to a peak of $ 46 per barrel in mid-October.
Rapid US intervention and subsequent military success help reduce future oil supply risks, thus calming markets and restoring confidence. After just nine months, the spike subsided, although the Kuwaiti oil fire that was set by the withdrawal of Iraqi forces was not completely extinguished until November 1991, and it took years for the combined production of both countries to regain their original level.
US. financial response
The US Federal Reserve's monetary tightening in 1988 targeted rapid inflation in the 1980s. By raising interest rates and lowering growth expectations, the Fed hopes to slow down and ultimately ease inflationary pressures, creating greater price stability. The August 6th invasion was seen as a direct threat to the price stability that the Fed sought. In fact, the Economic Advisory Council issued a consensus estimate that a 50 percent increase in the price of oil could raise the price of the economy temporarily by 1 percent and potentially bring down the real output by the same amount.
Despite the potential for inflation, the US Fed and central banks around the world decided that there was no need to raise interest rates against the rising oil prices. Instead, the US Federal Reserve decided to keep interest rates as if a surge in oil prices did not occur. The decision to refrain from this action stems from a belief in the future success of Desert Storm to protect major oil-producing facilities in the Middle East and a desire to maintain the credibility of long-term economic policies that have been built during the 1980s.
To avoid being accused of not acting in the face of potential economic turmoil, the US revised the Gramm-Rudman-Hollings Declining Budget Law. Initially, the move prohibited the US from changing the budget deficit target even in the event of a negative shock to the economy. As oil prices rise, revisions of these measures allow the US government to adjust its budget for changes in the economy, further reducing the risk of rising prices. The result was a $ 46 per barrel peak in mid-October, followed by a steady decline in prices until 1994.
Maps 1990 oil price shock
See also
- Energy crisis
References
Source of the article : Wikipedia
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