Reduced Libyan output, broader political unrest in the Middle East, and a slow global recovery have raised the uncertainty surrounding oil prices. This column discusses the challenges and value of forecasting future oil prices in real time, as opposed to fitting models to revised oil prices released months after economic decisions are made.

High oil prices are back – more than $125 per barrel. Such prices are associated with the macroeconomic pains of the 1970s, but this column argues that the recent surge may actually be good news for developed economies’ industries. The logic lies in the difference between demand shocks and supply shocks.

In Discussion Paper 6559 Research Fellow Lutz Killian dispels a number of myths concerning oil price shocks and their impact on the US economy. What is the origin of oil price shocks? Most oil price shocks since the 1970s have been driven by a combination of strong global demand for industrial commodities (including crude oil) and expectations shifts that increase precautionary demand for crude oil specifically.