How to Teach an Oil Shock?

This paper presents a method for teaching the impact of oil shocks on marginal costs, suitable for both introductory and intermediate-level undergraduate students of economics. It derives marginal costs from a basic production function with capital, labor and material inputs. An oil shock affects the price of material inputs, and its impact depends on the energy intensity of production. As oil shocks are recurring and their relationship with recessions has historically been strong, the paper offers a pedagogical framework to connect firm-level costs to macroeconomic outcomes. The material is illustrated by an interactive classroom tool ready for presentation to introductory (principles) level students. Instructors at this level may focus on the intuition and the interactive visualization and skip the formal analysis. Intermediate and advanced students would benefit more from the formal analysis, while still taking advantage of the interactive tool.