The United States still feels oil shocks. It just doesn’t feel them the way it did when America was dancing to disco and waiting in gas lines. If the Fed is right, the idea that every oil shock leads to recession is outdated.
A new study from the Federal Reserve Bank of Boston finds that rising domestic oil production has fundamentally changed how higher crude prices ripple through the U.S. economy. The result is a country that remains vulnerable to energy inflation but is far less likely to suffer the kind of employment damage that accompanied the oil crises of the 1970s.
Researchers estimate that the current oil shock tied to the Iran war—a roughly 33% price shock under the Fed’s methodology—would add about 1.5 percentage points to inflation over the following year. In the 1970s, a comparable shock would have pushed inflation up by roughly 2.2 percentage points.
The bigger change shows up in jobs.
According to the study, a shock of that magnitude would have reduced employment growth by about 1.8 percentage points in the 1970s. Today, that effect has largely vanished.
The reason sits beneath the shale fields of Texas, New Mexico, North Dakota, and Oklahoma.
Before the shale boom, higher oil prices mostly acted as a tax on the broader economy. Today, some regions lose while others win. The Fed found that Texas could see employment growth rise by roughly 1.7 percentage points after an oil shock, while states with little oil production, such as Massachusetts, would likely experience job losses.
The study argues that these regional offsets have become large enough to cushion the national labor market.
Another finding may be even more important for policymakers. The United States now uses less than one-third as much oil per unit of economic output as it did during the 1970s, while becoming a net exporter of petroleum products thanks largely to the shale revolution.
That has reduced the economy’s overall oil dependence. It has not eliminated inflation risk.
In fact, the Fed suggests the employment side of the equation has weakened so much that future oil shocks may increasingly look like an inflation problem rather than a recession problem.
For the Federal Reserve, that’s a very different headache than the one policymakers faced fifty years ago.
By Julianne Geiger for Oilprice.com
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