This paper reports on developments in theoretical and empirical understanding of the macroeconomic consequences of oil price shocks since 1996, when the U.S. Department of Energy sponsored a workshop summarizing the state of understanding of the subject. Four major insights stand out. First, theoretical and empirical analyses point to intra- and intersectoral reallocations in response to shocks, generating asymmetric impacts for oil price increases and decreases. Second, the division of responsibility for post-oil-price shock recessions between monetary policy and oil price shocks, has leaned heavily toward oil price shocks. Third, parametric statistical techniques have identified a stable, nonlinear, relationship between oil price shocks and GDP from the late 1940s through the third quarter of 2001. Fourth, the magnitude of effect of an oil price shock on GDP, derived from impulse response functions of oil price shocks in the GDP equation of a VAR, is around -0.05 and -0.06 as an elasticity, spread over two years, where the shock threshold is a price change exceeding a three-year high.

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Urbanization and industrialization are the most prominent features of economic development. The energy use changes brought by industrialization are well known, but urbanization also imposes major, if subtle, changes in energy use. Urbanization shifts production activities formerly undertaken in the home with little or no energy to outside producers who do use energy. One of the largest changes is the daily travel of urban residents, primarily but not exclusively, to work Personal transportation in rural areas generally entails little or no fuel use, while urban transportation does, particularly as incomes increase. Higher density living also induces substitutions of modem for traditional energy forms. Finally, food must be transported longer distances to urban consumers than to rural, agricultural consumers.

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