Did Yellen Break OPEC? For the first time in fifty years, a sharp rise in oil prices did not produce a recession.

• Author: Verleger, Philip K.

In January 1979, I recall being called to the office of Anthony Solomon, then U.S. under secretary of the Treasury for monetary affairs. An oil worker strike in Iran had collapsed the country's production and prompted the Shah to flee. The United States called on Saudi Arabia to boost oil output to offset the lost Iranian crude. The Saudis agreed but insisted on a higher price. At the time, I was an adviser on oil and energy policy at Treasury. Secretary Solomon had one simple question: "How could they do this to me?" Tony took the price increase as a personal affront. History shows, though, that the market was disintegrating.

Solomon's disappointment followed the failed efforts of key Treasury officials, including William Simon, to negotiate lower oil prices with Saudi Arabia. (While Simon and his successor Mike Blumenthal did not talk the Saudis into lower prices, they did get oil-exporting nations to deposit their increased revenue with Western banks, an important achievement.) Indeed, from 1980 to 2022, all efforts by Treasury officials to influence oil prices bombed.

Current U.S. Treasury Secretary Janet Yellen has ended Treasury's dismal track record. She has done it by applying good economic policies to the problem of high oil prices while ignoring all oil-exporting countries, including Saudi Arabia. Oil prices today are probably 30 or 40 percent lower than they might have been had past policies been continued. And, for the first time in fifty years, a sharp increase in oil prices has not been associated with a recession. Yellen deserves credit for this success.

Yellen's achievement can be seen in Figure 1. This graph shows the year-over-year change in gasoline prices by month from 1973 to 2023. The shaded areas denote recessions as defined by the National Bureau of Economic Research. Note that the recessions of 1973-74,1980,1990, 2000, and 2008 were all associated with substantial gasoline price increases. One can also note that no recession has been associated with the 2021-2022 price rise even though it is the largest and longest among these examples.

The United States and the world avoided recession this time in part because Yellen spearheaded the large strategic reserve oil release announced in March 2022, which totaled more than two hundred million barrels over the twelve months. The release was widely derided by the "sophisticated" pundits who comment almost daily on oil markets. However, it worked.

The release worked because it defused the "hoarding" response that accompanied earlier disruptions. The 1990 price increase after Iraq's invasion of Kuwait led to large price increases despite inventories being high. Many pundits were puzzled by the price rise. In contrast, anyone who had studied commodity markets understood that firms that held inventories chose to limit their selling, fearing the stocks could not be...