Lower Oil Prices and the U.S. Economy: Is This Time Different?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We explore the effect on U.S. real GDP growth of the sharp and sustained decline in the global price of crude oil and hence in the U.S. price of gasoline after June 2014. Our analysis suggests that this decline produced a cumulative stimulus of about 0.9 percentage points of real GDP growth by raising private real consumption and non-oil related business investment and an additional stimulus of 0.04 percentage points reflecting a shrinking petroleum trade deficit. This stimulating effect, however, has been largely offset by a large reduction in real investment by the oil sector. Hence, the net stimulus since June 2014 has been close to zero. We show that the response of the U.S. economy was not fundamentally different from that observed after the oil price decline of 1986. Then as now the response of the U.S. economy is consistent with standard economic models of the transmission of oil price shocks. We found no evidence of an additional role for frictions in reallocating labor across sectors or for increased uncertainty about the price of gasoline in explaining the sluggish response of U.S. real GDP growth. Nor did we find evidence of financial contagion, of spillovers from oil-related investment to non-oil related investment, of an increase in household savings, or of households deleveraging. Terms of use: Documents inJEL-Codes: E320, Q430.

The Effects of Oil Supply and Demand Shocks on U.S. Consumer Sentiment

“…Oil supply and demand shocks affect household disposable income available for other expenditures through gasoline and energy prices (see, e.g., Edelstein and Kilian 2009, Baumeister and Kilian 2017, Baumeister, Kilian, and Zhou 2018. Yet much of the existing literature focuses on the effect of oil price shocks on real GDP, inflation, or stock prices.…”

“…Following an increase in the real price of crude oil, higher gasoline and energy prices reduce household disposable income excluding energy and tighten the budget for other expenditures. At the same time, higher gasoline prices raise the operating cost of vehicles, making purchases less attractive (see Baumeister and Kilian , Baumeister, Kilian, and Zhou ). Beyond the reduction in current disposable income, gloomy expectations about future economic conditions due to oil price fluctuations might depress consumer spending further.…”

The Role of Oil Price Shocks in Causing U.S. Recessions

“…It suggests that the recessionary effects of oil price shocks tend to be modest, it casts doubt on economic theories stressing asymmetries in the transmission of positive and negative oil price shocks, and it suggests that unexpected declines in the real price of oil on average should have at least modest stimulating effects on the economy. Two such episodes are studied in more detail in Edelstein and Kilian (, ) and in Baumeister and Kilian ().…”

“…Another possibility is that the vulnerability of the U.S. economy increases in the share of nominal oil use in U.S. nominal GDP. The role of variation in the energy share has been stressed by Edelstein and Kilian () and Baumeister and Kilian (), for example. If a higher U.S. oil share amplifies the effects of oil price shocks, one would expect a negative correlation with the conditional response.…”

Industry Effects of Oil Price Shocks: Re-Examination

“…Edelstein and Kilian (2009), Hamilton (2009), Yellen (2011, 2015). Baumeister and Killian (2016) explain that oil price shocks are terms of trade shocks that alter domestic spending in the U.S. economy. An increase in the price of oil leads to higher prices of gasoline.…”