When oil prices first plunged in 2014, there was hope that cheap gasoline would be a giant stimulus for the U.S. economy. Federal Reserve Chairwoman Janet Yellen cited a statistic that the average household would save $700 in fuel costs. Two years on, it’s not at all clear that oil prices provided a major net boost to economic growth. As oil prices declined, many U.S.-based oil producers were forced to sharply curtail their drilling activity. Waves of layoffs followed in the oil and gas industry. The drop presented both good and bad news for the overall U.S. economy.
Janet Yellen
A new paper, being presented Friday at a Brookings Institution conference, crunched the numbers to show just how closely these two factors offset each other. The paper estimates that higher discretionary income, thanks to low oil, boosted consumption by 0.61%. They estimate that the collapse of oil drilling reduced investment by 0.62%. In plain English, the boost to consumer-spending power from low oil prices almost exactly equaled the hit to investment from low oil prices.
The paper from University of Notre Dame economist Christiane Baumeister and University of Michigan economist Lutz Kilian finds “the net stimulus since June 2014 has been effectively zero.” The economists examine a range of other factors that could have significantly boosted or dented the economy, but find the evidence lacking. An increasing propensity to buy automobiles and a change in the U.S. trade balance had small impacts on the economy. They find no evidence that non-oil-producing sectors of the economy stepped up investment, which could have been a positive.They find no evidence that banks were forced to tighten credit because they’d made bad loans to oil producers, which would have been a negative.
Perhaps most intriguingly, the paper argues this should have been largely predictable — because what’s happened in the U.S. over the past two years is quite similar to an oil-price decline that hit the economy in 1986. “Overall, there are more similarities than differences,” the authors write. The 1986 oil-price collapse also hit the economy in these same two key ways — a boost to consumption and a decline in oil investment (in the 1986 episode, the economy of Texas was hit particularly hard). The 1986 episode is remembered more fondly for two simple reasons: First, the price of oil did not fall as much in 1986, so the effect on U.S. oil producers was more muted. Second, though the decline in prices was smaller in 1986, people spent a larger share of their incomes on gas than they do today, so there was simply greater scope for consumers to benefit. A more careful look at the 1986 episode may have led to the conclusion, from the outset, that low oil prices weren’t going to ignite the U.S. economy.
