The story is exactly the same following the 1979-81 price shock, which reflected another Mid-East-related interdiction in supply as well as U.S. wellhead price controls, excess profits taxes on oil companies, and gas rationing. Following this energy supply shock, the price of oil again rose (by over 117 percent), the stock market weakened, the economy faltered (declining nearly 2.2 percent), and unemployment surged (increasing 2.2 percentage points). While by no means the sole cause of the U.S. recession of 1981-82, the high price of oil was a major contributor.
When Iraq invaded Kuwait in 1990, the U.S. responded with "Desert Storm." Again, oil supplies were greatly reduced, causing a supply-induced energy shortage once again. Oil prices rose and the world experienced an economic slowdown. The culprit was yet another Middle East-induced interdiction of supply that led to a collapse in the U.S. stock market and economy.
On average, the historical supply induced energy shocks increased the price of oil by over 113 percent, shrank the economy by over 2 percent, increased the unemployment rate by 2.6 percentage points, and led to significant declines in the stock market. The moral of these stories is clear: a supply-induced energy shock is bad for the U.S. economy.
These lessons should not be lost with respect to the potential future energy supply shock Washington D.C. is currently considering. If the U.S. Congress imposes cap & trade regulations this Fall, then the country will face a significant energy supply shock. The evidence on the impacts from past energy supply shocks on the economy is clear. Energy supply shocks lead to large increases in energy prices, reduce our welfare, and decrease employment. Due to the large economic pain that will result, cap & trade advocates (especially those businesses attempting to be socially responsible) should reconsider the wisdom of their penance.