Current Macroeconomic Issue Term Paper

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oil shock (like the one now looming as a result of the impending war with Iraq) will affect the United States economy.

War with Iraq is imminent. While any degree of instability in the Middle East region is reason enough to worry, when one couples this reality with the fact that Saddam Hussein is widely considered to be unstable, the recipe for disaster is compounded many-fold. Unfortunately for the United States, this disaster will not be contained to the immediate region of the Persian Gulf. The oil supply disruption that is sure to follow the launching of an attack by American troops will reverberate throughout the world and will hit the U.S. economy especially hard because of its high dependence on this fossil fuel.

Synopsis of Issue

To get some kind of perspective on this issue, consider the extent of the known oil reserves in Iraq. According to reliable estimates these reserves alone "could cover current U.S. imports for almost a century." Now add to this vast reserve the 220 billion barrels of oil that may still be under the ground in Iraq (Zagorin, 2003, p. 32). If forced into a corner, Saddam could sabotage these very reserves as well as the oil fields of his neighbors. In this scenario, "a major shortfall of up to 6 million bbl. A day - 8% of world consumption - is foreseeable.

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" (Zagorin, 2003, p. 33). This type of a cut in supply would send such a shock through the oil market that prices could hit $80 per barrel before the situation could be brought under control (Zagorin, 2003, p. 33).

Macroeconomic Effect on the National Economy

The relevance and currency of this issue is clear. The only question which needs to be addressed is: "How will an oil shock like the one described above affect the United States Economy?" For starters, the U.S. is highly dependent on imported oil. While in 1973 imports of oil were 35% of total consumed oil, by 2000 this percentage had increased to 50%. Some economists expect that by 2020 this will be 64% (Energy, n.d., p. 1). Therefore, unless the politicians in Washington decide to allow development in Alaska (or scientists develop a truly viable energy alternative), the United States will be dependent on foreign oil for the foreseeable future. With this in mind, the remainder of the paper will deal with the two types of macroeconomic costs for the United States as a result of high oil prices: higher inflation/interest rates and decreased output/consumption.

Starting at the most basic level, when oil prices go up so do everyday prices of gas and heating oil. This….....

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