The analysis explains how previous oil shocks have affected real U.S. income. Real income differs from aggregate economic output (GDP) because it includes the purchasing power losses associated with more expensive imported petroleum. Real income declines immediately during the same quarter as the oil price shock as opposed to the output effects, which are lagged over several quarters. These immediate losses can be significant, reaching as much as 1.7% of the baseline value in the same quarter, for a doubling of crude oil prices. Expanding coverage to include purchasing power losses allows policy analysts to evaluate a range of different policy instruments that can influence oil prices, such as the building and release of the strategic petroleum reserve.
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