An evaluation of some microeconomic consequences of a future oil embargo

In order to develop an energy policy designed to help insulate the economy against the effects of a future oil embargo, projections of the effects of an embargo are necessary. Past work has concentrated on the aggregate output loss from an embargo, but has not carefully considered other important effects. This paper examines two important effects. First, the most heavily damaged sectors are identified, showing the automobile industry to have by far the most significant damage. Second, a large part of the economic damage done by an embargo is shown to be due to a decline in the demand for output rather than as a direct consequence of reduced petroleum supplies. This finding is significant for two related policy reasons. First, it implies that even if policy makers could replace all of the embargoed oil, major economic disruptions could still result from an embargo. Second, policies designed to minimize demand disruptions can achieve significant benefits, at low cost, and should have a high priority in policy matters pertaining to embargoes.Financial support for this work was received from the Department of Energy, and this paper is a condensed version of a report sent to the DOE. Views expressed in this paper are those of the author, and do not necessarily reflect the position of the Department of Energy.