Transcript The Effects of the Recent Oil Price Shock on the US Economy

The Effects of the Recent
Oil Price Shock on the US
Economy
Oil & The Economy

Oil prices have a stagflationary effect on
the economy
• They slow the rate of growth of the economy
and could actually lower the level of output
(i.e. create a recession)
• They lead to an increase in the price and
possibly an increase in the inflation rate
• Oil prices act like a tax with the revenues
going to oil producers rather than the
government
Factors

Size of the shock in both level and growth
Oil Prices

The current 65% increase is comparable to the increases in
2000 (although from a very low level of $15) and 2003
Oil Prices

It is dwarfed, however, by the 1973 increase (135%
increase to a real price of $43) and the 1979 increase
(210% increase to a real price of $82)
Factors


Size of the shock in both level and growth
Persistence
• The current price of oil primarily reflects
Chinese demand and a middle east “Fear
Premium”
Factors



Size of the shock in both level and growth
Persistence
• The current price of oil primarily reflects
Chinese demand and a middle east “Fear
Premium”
US Dependency
• US dependency has fallen (by about 50% since
1980), but our production has fallen as well
(imports of oil amount to 1.2% of GDP
compared to .9% in 1970)
Estimates

Private sector estimates suggest two
scenarios:
• A persistent level of $35/Brl will cost the
US approximately .3-.5% of GDP growth
• A persistent $45 level will cost the US
1-1.2% of GDP growth
Dangers

Even though high prices are
predominantly coming from a booming
Asia, from the US perspective, it is a
supply problem, not Demand
Dangers

The tight oil market gives Saudi Arabia an
extreme amount of power (Saudi Arabia is
one of the few suppliers with spare
capacity)
Dangers

US consumers are extremely vulnerable.
Low interest rates have allowed
consumers to spend at a level that has
outpaced their income.
Dangers

The Federal Government and the Federal
Reserve have significantly less “wiggle
room” for policy.
• The federal budget is already stretched thin
with an estimated $500 Billion deficit this year.
• During the 2000 and 2003 “mini-shocks”, we
were more concerned with deflation rather
than inflation – this gave the fed room to lower
interest rates.