oil price rise is on the order of $ 15 a barrel. since the united states now imports 4. 5 billion barrels of oil per year, this price rise makes for an effective reduction in named after john b. taylor ( 1983 ), " discretion versus policy rules in practice, " carnegie - rochester conference series on public policy, vol. 39 ( december ), pp. 195 - 214. astute chart - gazers will note that the commonly quoted price in figure 2, for a barrel of west texas intermediate crude oil, is higher than the current price of oil in gross domestic product shown in figure 1. that is because, on average, the united states uses a lower quality of oil in its production of total output. a stock exchange term for a percentage paid by a seller of stock for the privilege of delaying its delivery until some agreed on future date. in effect, the futures price is less than the spot price. domestic income of $ 68 billion. to the extent that dollars going to domestic oil producers are not fully recycled, the effective demand reduction could be even greater. there could also be important parallel effects in natural gas and other markets. the rise in consumer prices from all these sources, as well as the reduction in aggregate demand, could be noticeable. all things considered, although the present oil shock may not be as significant as the shocks we remember from the 1970s and 1980s, it will definitely register. a final issue involves the initial position of the economy and monetary policy. in the usual exercise, one analyzes the economy in some sort of equilibrium position and posits an oil price shock, which normally results in the temporary increases in inflation and unemployment described earlier. when monetary policy begins with inordinately low nominal interest rates, the reasoning becomes more complicated. now the response to the oil shock is, in effect, superimposed on any re - equilibration process built in for monetary policy. the ultimate response of the economy will blend the two responses, though not additively because of the complicated nonlinear structure of the economy. the net effect of these factors is difficult to perceive in any more than broad outline. without the oil shock, policymakers beginning from a period of low interest rates would try to keep the economy on an even growth path as they gradually raised nominal interest rates. with the shocks, nominal rates would still likely follow an upward path, though the economic reactions would be bumpier, with temporary rises in both inflation and unemployment. conclusion as a new

gas production in the gulf are operating at less than 50 percent of pre - katrina levels. since the first evacuations of oil and gas facilities were ordered before katrina, cumulative shortfalls represented almost 4 percent of the nation's annual production of crude oil and 2 percent of our output of natural gas. the combination of flooding, wind damage, and a lack of electric power also forced many crude oil refineries and natural gas processing plants to shut down. the restoration of production at the affected natural gas processing facilities has proceeded particularly slowly, in part because of the lack of natural gas feedstocks and infrastructure problems. most refineries, however, will be back on line within the next month or so, though a few may take longer. in the interim, a greater output of refined petroleum products in other areas of the country and much higher imports, especially of gasoline, are making up for the production shortfalls in gulf refining. the temporary lifting of some environmental regulations and the suspension of the jones act facilitated those adjustments. in addition, refiners have shifted the mix of production toward more gasoline and less heating oil and jet fuel. that shift has had benefits in the short run, though the longer it continues, the greater the possibility of upward pressure on distillate fuel oil prices during the winter heating season. releases from the nation's strategic petroleum reserve relieved much of the upward pressure on crude oil prices, and imports of refined products responded rapidly to ease the price pressures stemming from the loss of refinery production in the gulf. as a consequence, the nationwide retail price of gasoline for all grades has declined 60 cents per gallon from its peak of $ 3. 12 per gallon in the week of september 5. motorists appear to have economized on their driving, and gasoline demand appears to be off a bit. however, it will take time and an appreciable increase in the fuel economy of our stock of motor vehicles to fundamentally change the amount of motor fuel used on our nation's highways. 1 / 3 the far more severe reaction of natural gas prices to the production setbacks that have occurred in the gulf highlights again the need to expand our nation's ability to import natural gas. in contrast to the fall in crude oil prices and the sharp narrowing of refinery margins during the past two months, natural gas prices have remained high. moreover, judging from elevated distant futures prices, traders expect natural gas prices to edge lower but to stay high for the foreseeable