This Presentation will give an idea about the STAGFLATION occured in the USA in 1970's due to increasse of Oil prices as a result of formation of OPEC(Organisation of Petroleum Exporting Countries).

1. A
presentation on
case study
“oil and the economy”
By
Nikhil Gupta

2. Introduction
• Crude oil is the key input into the production of many goods
and services.
• This case deals about the STAGFLATION occurred during
the 1970’s in the U.S due to the increase in the price of oil as
a result of formation of OPEC (Organisation of the
petroleum exporting countries).

3. OPEC
• The Organization of the Petroleum Exporting Countries (OPEC) was
founded in Baghdad, Iraq, with the signing of an agreement in September
1960 by five countries namely Islamic Republic of Iran, Iraq, Kuwait,
Saudi Arabia and Venezuela. They were the Founder Members of the
Organization.
• These countries were later joined by Qatar (1961), Indonesia (1962), Libya
(1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971),
Ecuador (1973), Gabon (1975) and Angola (2007).
• Ecuador suspended its membership in December 1992, but re-joined OPEC
in October 2007. Indonesia suspended its membership in January 2009,
reactivated it again in January 2016, but decided to suspend its membership
once more at the 171st Meeting of the OPEC Conference on 30 November
2016. Gabon terminated its membership in January 1995. However, it re-
joined the Organization in July 2016.
• This means that, currently, the Organization has a total of 13 Member
Countries.

4. STAGFLATION
• STAGFLATION is a situation in which the Inflation Rate is high and
the Economic Growth rate slows down and Unemployment remains
steadily high. It raises a dilemma for economic policy since actions
designed to lower inflation or reduce unemployment may actually
worsen economic growth.
• The term "stagflation" was first coined during a period of inflation and
unemployment in the United Kingdom. The United Kingdom
experienced an outbreak of inflation in the 1960s and 1970s. On 17
November 1965, Iain Macleod, the spokesman on economic issues for
the United Kingdom's Conservative Party, warned of the gravity of the
UK economic situation in the House of Commons: "We now have the
worst of both worlds—not just inflation on the one side or stagnation on
the other, but both of them together. We have a sort of "stagflation"
situation.

5. 1. STAGFLATION can result when the productive capacity of an economy is
reduced by an unfavourable supply shock, such as an increase in the price of oil
for an oil importing country. Such an unfavourable supply shock tends to raise
prices at the same time that it slows the economy by making production more
costly and less profitable.
2. Both STAGNATION and INFLATION can result from inappropriate
macroeconomic policies. For example, central banks can cause inflation by
permitting excessive growth of the money supply, and the government can cause
stagnation by excessive regulation of goods markets and labor markets. Either of
these factors can cause stagflation. Excessive growth of the money supply taken
to such an extreme that it must be reversed abruptly can clearly be a cause.
Reasons for stagflation

6. • The 1970s oil crisis really began in 1973. What we see in this crisis is the fact
that prices of commodities like oil play a much more vital role in our economy
than most think. The world needs so much oil every day to run, and will literally
need to pay whatever it costs, or it will cease to run.
• The major cause of the 1970s oil crisis was the fact that oil prices were
quadrupled by OPEC. This, along with the increased government spending
which came with the Vietnam War(1 Nov 1955 – 30 Apr 1975), led to severe
stagflation in the United States. This “oil shock”, along with the accompanying
stock market crash, were considered by many to be the first events to have a
persistent affect on the United States.
• This also goes to show how much of an effect the Middle East had on life in the
United States, as it was Middle Eastern countries that raised the price of oil.
• In October of 1973 OPEC stopped exports to the US and other western nations to
punish the support of Israel, they realized the strong influence that they had on
the world through oil. The immediate results of the Oil Crisis were dramatic.
Prices of gasoline quadrupled, rising from just 25 cents to over a dollar in just a
few months.
• They meant to punish the western nations that supported Israel, their foe, in the
Yom Kippur War(6 Oct 1973 – 26 Oct 1973), but they also realized the strong
influence that they had on the world through oil. One of the many results of the
embargo was higher oil prices all throughout the western world, particularly in
America.

7. aggregatesupply/aggregatedemand model
• The Aggregate demand/Aggregate supply model is a model that shows
what determines total supply or total demand for the economy and how
total demand and total supply interact at the macroeconomic level.
• Movements of either the aggregate supply or aggregate demand curve in an
AD/AS diagram will result in a different equilibrium output and price
level.
• The aggregate supply curve shifts to the right as productivity increases or
the price of key inputs falls, making a combination of lower inflation,
higher output, and lower unemployment possible.
• The aggregate supply curve shifts to the left as the price of key inputs rises,
making a combination of lower output, higher unemployment, and higher
inflation possible.
• When an economy experiences stagnant growth and high inflation at the
same time it is referred to as stagflation.

8. • If either the aggregate supply or aggregate demand curve shifts in the
aggregate demand/aggregate supply—AD/AS—model, the original
equilibrium in the AD/AS diagram will shift to a new equilibrium.
• If the aggregate supply—also referred to as the short-run aggregate
supply or SRAS—curve shifts to the right, then a greater quantity of
Real GDP is produced at every price level. If the aggregate supply
curve shifts to the left, then a lower quantity of Real GDP is produced
at every price level.
How changes in input prices shift the AS curve
• Higher prices for inputs that are widely used across the entire
economy—for example, Oil, Wages and Energy products—can have a
macroeconomic impact on aggregate supply.
• Increases in the price of such inputs cause the SRAS curve to shift to
the left, which means that at each given price level for outputs, a
higher price for inputs will discourage production because it will
reduce the possibilities for earning profits. Diagram B, on the right
above, shows the aggregate supply curve shifting to the left,
from SRAS0 to SRAS1, which causes the equilibrium to move
from E0 to E1

9. Source( www.khanacademy.org)
• This movement from the original equilibrium of E0 to the new equilibrium
of E1 brings a nasty set of effects: reduced GDP or recession, higher
unemployment because the economy is now further away from potential GDP,
and an inflationary higher price level as well.

10. • The US economic recessions in 1974–1975 was preceded or accompanied by a
rise in the key input of oil prices. In the 1970s, this pattern of a shift to the left in
SRAS leading to a stagnant economy with high unemployment and inflation.
• On the other hand, a decline in the price of a key input like oil will shift the SRAS
curve to the right, providing an incentive for more to be produced at every given
price level for outputs. From 1985 to 1986, for example, the average price of
crude oil fell by almost half, from $24 a barrel to $12 a barrel. Similarly, from
1997 to 1998, the price of a barrel of crude oil dropped from $17 per barrel to
$11 per barrel. In both cases, the plummeting price of oil led to a situation like
that presented in Diagram A, on the left above, where the shift of the SRAS
curve to the right allowed the economy to expand, unemployment to fall, and
inflation to decline.

11. References
• www.yourarticlelibrary.com
• www.opec.org
• www.transmissionsmedia.com
• www.wikepedia.org
• www.khanacademy.org

12. Thank you