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

By Christiane Baumeister, Lutz Kilian. Social Science Research Network, 2017

183 citations recorded by the source corpus.

ABSTRACT:We explore the effect of the sharp and sustained decline after June 2014 in the global price of crude oil (and hence in the U.S. price of gasoline) on U.S. real GDP growth. Our analysis suggests that this decline produced a cumulative stimulus of about 0.9 percent of real GDP by raising private real consumption and non-oil-related business investment, and an additional stimulus of 0.04 percent, reflecting a shrinking petroleum trade deficit. This stimulative 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 U.S. economy’s response was not fundamentally different from that observed after the oil price decline of 1986. Then as now, the U.S. economy’s response is consistent with standard economic models of the transmission of oil price shocks. We find no evidence that frictions in reallocating capital and labor across sectors or increased uncertainty about the price of gasoline explain the sluggish response of U.S. real GDP growth. Nor do 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.

Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment

View Paper: https://www.semanticscholar.org/paper/d3fa9f5d5083a2b48f0e073ff0377003ef82ff79

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Citations in the corpus

The Impact of the Fracking Boom on Arab Oil Producers (2016, background): “This pattern changed in 2005, even before the fracking boom, when the U.S. economy learned to make do with less crude oil during an economic expansion amidst high and rising oil prices (see also Baumeister and Kilian 2017).”