(How Gasoline Works)
The economy of the United States has witnessed four major shocks in connection with the oil price which occurred during 1973-74, 1979-80, 1990-91, NS 1999-2000 with a time span of 25 years. There was a unanimous view among the analysts that holding of energy independently would be the pivotal factor for designing a relevant National energy policy. If higher energy efficiency is mastered the aftermath of the oil price shock on the economy can be controlled. This effect has been proved for the year 1999-2000 where the oil price shock had a negligible effect on the economy when compared to the recent past. The candidates for the presidential campaign brought to light the necessity for greater American energy independence and expressed the idea of less dependence on oil import. Even though the United States has a hold to effect the gas price, it is to be understood that the market is not national but international. The American energy policy proves to be relatively undeterred force of supply and demand which allowed constituting the prices for various energy sources. The public consumption of the energy source is also effected through this policy. The prices that are thought to be particularly sticky are wage contracts, publication subscriptions and items from catalogues. (Labonte; Makinen, 2000)
The totally market based national energy policy argues that the market prices may blend all the relevant costs to the individual it may exempt the cause that are relevant to the nation. It is important to note that the prices may fall short to bring in a premium that would counteract any unwarranted foreign influence on the foreign and domestic policies of the United States. In the end, since the oil supply shocks are fickle and less anticipated market prices can soar high when they occur. So when this jerk disrupts, as in the past, it will have a considerable effect on Gross Domestic Product -- GDP, employment and inflation. Oil being an inevitable ingredient in the production and transit of most goods, naturally an oil price hike will affect the cost of production for the producers. This effect will also be shunned by products which use supplementary energy sources since those prices would have also experienced a hike. Thus the supply shock decreases an economic output and increases the price level in a short run.
If there is flexibility in the prices then the producers could reduce input prices such as wages excluding the total output and total price level. Only then, there would be no decline in output or hike in the price level. But when sticky prices persist then producers have no other alternative than to lower the rest of the input prices quickly which would result on a price hike that would affect the consumers. The consequence would be the rate of output is lowered as people decide to buy fewer goods, the prices being higher. Price of labor would be compensated with some employers signed off. So with fewer workers, only a lesser output is produced, so a rise in the price of oil and the inefficacy of other prices to accommodate temporarily results in the reduction of the rate of growth of output that is produced by an economy. (Labonte; Makinen