The Link Between Oil Prices and the U.S. Macroeconomy by Blake Clayton

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Blake Clayton is the fellow for energy and national security at the Council on Foreign Relations. His publications include Commodity Markets and the Global Economy and Fear, Greed, and Oil: A Century of Panics in the World Oil Market (both forthcoming in 2014.) He received his DPhil at Oxford University and holds dual master’s degrees from the University of Chicago and Cambridge University.


"Oil price volatility thas been shown to predict slower U.S. GDP growth, implying that even falling prices can have contractionary consequences..."
 
"In practice...the relations between oil prices, core inflation, and monetary policy is less straight- forward..."
 
"Much of the country might cheer on declining oil prices, but for some parts of the country they can be devastating..."


For the United States and other net importers of oil, the last two years have the dubious distinction of featuring the highest average annual crude oil prices, in both real and nominal terms, since the beginnings of the modern oil industry in the 1860s. Such elevated prices for oil, marked by extreme volatility at times, pose risks to the still-anemic U.S. and global economies, though they have proven a boon to the domestic oil industry and the regions of the country where oil and gas are produced. Still, the U.S. economy is much less affected by changes in oil prices today than it was in the 1970s, for instance, when the first modern oil crises wreaked havoc on the national economy.

Understanding how oil prices affect the economy of the United States is crucial to sensible domestic policymaking. The consequences of today’s relatively high oil prices, for instance, vary tremendously across the country’s geographic regions, economic sectors, and population segments. Pinpointing the exact dynamics at play, as well as measuring their magnitudes, is difficult to do with precision. But several decades of research have yielded critical insights. These findings can help inform policy decisions in realms as diverse as economic sanctions, strategic petroleum reserve releases, and gasoline taxes, limiting any negative implications their effects on oil prices might cause to the broader economy and maximizing their potential benefits... (purchase article...)