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Page added on September 16, 2016
Turns Out That Oil Prices Don’t Matter
Oil is not just the fuel that runs our cars. It’s also the fuel that runs our economies.
Petroleum is a feedstock for plastics and petrochemicals. It provides heat and electricity. And of course, it provides the primary means by which we move all of the goods we produce, and the workers who produce them, and the consumers who consume them. It is a critical member of a class of product that economists call “intermediate goods” — goods that are used to produce other goods and services.
As you can imagine, oil prices are thought to have a big effect on the economy. When prices rise, that tells us that oil is scarce relative to demand, and therefore that we can make and consume less stuff than we’d like to. When prices fall, we are lolling about in unexpected bounty. A new paper by economists Christiane Baumeister and Lutz Kilian attempts to estimate just how big an effect the recent sharp decline in oil prices has had on the gross domestic product of the U.S. Their answer is … none.
Um, what? Come again?
That’s right, none. There was a stimulative effect on the consumer side, but it was offset by the loss of investment in the oil sector. They write:
Our analysis suggests that this decline produced a stimulus of about 0.7 percentage points of real GDP growth by raising private real consumption and an additional stimulus of 0.04 percentage points reflecting a shrinking petroleum trade deficit. This stimulating effect, however, has been largely offset by a reduction in real investment by the oil sector more than twice as large as that following the 1986 oil price decline. Hence, the net stimulus since June 2014 has been effectively zero.
If you’re a consumer who felt the pain of high gas prices, and breathed a sigh of relief when they finally dropped, this may seem surprising. But on a larger scale, whether high oil prices are good or bad for your economy depends on whether it’s a net importer or a net exporter. No one finds it hard to believe that falling oil prices were bad for big oil producers like Venezuela (and they were!). Conversely, if you’re a country that uses a lot of oil, and doesn’t produce any, it’s pretty obvious that higher oil prices will hurt, and lower ones will be good. What’s interesting is that, thanks to the shale oil boom in the U.S., this paper finds those two forces roughly balancing out.
It’s also interesting to ask what this could tell us about the coming election.
You can often do a surprisingly good job at predicting the outcomes of presidential races knowing only a few simple things about the economy. And yet, the models don’t all agree. The oldest prediction model, which is based on economic as well as non-economic indicators, has Republicans taking the White House. A Moody’s economist, on the other hand, says that for its model, which shows Hillary Clinton taking 326 votes in the electoral college, “The tie-breaker as of today is really gasoline prices.”
Yet that should show up in the polls, and right now, the polls aren’t showing us a comfortably dominant Clinton lead. This Baumeister-Kilian paper might give us some clue as to why: When America was a net importer of oil, gas prices might have had a substantial effect on elections, but that changed in recent years. The shale oil boom meant that even back when a lot of households were feeling pinched by higher fuel prices, people working in the oil industry, and associated firms, were made much better off. So the effect on the economy became less clear, and so did the effect on elections.
While the pain of high oil prices was probably more widespread than the joy, the pain of falling oil prices was probably more intense than the relief of cheaper gasoline, because losing your job is a lot worse than having to economize on driving. And while numbers matter in politics, intensity matters too. That’s why the National Rifle Association tends to win on gun issues, even though polling often shows the public disagrees with its positions.
Working is another central component of the identities of many Americans, an issue that’s probably powerful enough to move them to the polls all by itself. So just because the effects of oil come out in the economic wash, doesn’t mean that they will also disappear from our politics. I could tell two stories about this election: one in which low gasoline prices will help Clinton, because there are a whole lot of people in this country who drive, and one in which they help Donald Trump, because the folks who were thriving on the high oil prices are probably really miserable and ready for a change. I don’t know which of these stories is right, and I won’t until election day.
Or perhaps not even then. For the effects of all the variables in all the models may be swamped by something that no one predicted: the historically unprecedented emergence of two major-party candidates so unpopular that it’s less a matter of who the public wants to win, than who they’d rather see lose.
8 Comments on "Turns Out That Oil Prices Don’t Matter"
rockman on Fri, 16th Sep 2016 2:23 pm
And once more an armchair general with no appreciation of the complexity of the dynamic and the time lags involved. Nothing affects the economy in neither a simple or quick manner.
paulo1 on Fri, 16th Sep 2016 4:32 pm
Stupid article:
regarding: “When America was a net importer of oil, gas prices might have had a substantial effect on elections,”
Did I miss something? America no longer imports oil? Are these guys as stupid as they appear?
ghung on Fri, 16th Sep 2016 4:46 pm
Yeah, Paulo, the author uses this as a citation:
http://www.bloomberg.com/news/articles/2012-02-29/u-s-was-net-oil-product-exporter-in-2011
Of course, equating “oil products” with oil is a typical tactic.
penury on Fri, 16th Sep 2016 8:30 pm
Prices go up, prices go down. Times change and things are different. SO WHAT>
Davy on Sat, 17th Sep 2016 8:06 am
I am not sure how accurate these reports are. I read about this a few days ago. Anyone have an opinion?
“Why East Coast Gas Prices Are About To Explode”
http://www.zerohedge.com/news/2016-09-16/why-east-coast-gas-prices-are-about-explode
“The pipeline’s operator has said full service will not be restored until at least next week. The closure has set off an industry-wide scramble as suppliers seek alternative ways to transport gasoline to the East Coast. According to reports, the leak will likely start affecting drivers in the nearby states of Georgia, Tennessee, North Carolina and South Carolina within a matter of hours and may spread in coming days. Colonial Pipeline Co., which transports some 40% of the gas along the I-95 corridor says at least 250,000 gallons of gasoline have already been lost. Senior petroleum analyst Patrick DeHaan warned that some stations may run out as primary gasoline transportation shipping routes along the East coast have been temporarily closed. Not every station will be able to get the gasoline it needs, he said. “You’re going to see some places without gasoline,” he said. “It’s like a mini-hurricane.” The pipeline operator said that based on its current projections, parts of Georgia, Alabama, Tennessee, North Carolina and South Carolina will be the first markets to suffer potential supply disruptions.”
Davy on Sat, 17th Sep 2016 8:12 am
“A Dire Warning: “Someone Is Learning How To Take Down The Internet”
http://tinyurl.com/j8fmfaz
“Recently, some of the major companies that provide the basic infrastructure that makes the Internet work have seen an increase in DDoS attacks against them. Moreover, they have seen a certain profile of attacks. These attacks are significantly larger than the ones they’re used to seeing. They last longer. They’re more sophisticated. And they look like probing. One week, the attack would start at a particular level of attack and slowly ramp up before stopping. The next week, it would start at that higher point and continue. And so on, along those lines, as if the attacker were looking for the exact point of failure.”
Cloggie on Sat, 17th Sep 2016 8:24 am
““Someone Is Learning How To Take Down The Internet””
The internet is currently essentially anarchistic and global. If somebody in say New York submits a request to a server in Boston, it could happen that a series of “hops” are initiated that could travel around the globe.
A remedy against these kind of attacks could be to design an internet architecture that forbids cross border traffic if origin and destination are in the same country. If a foreign cyber attack occurs, governments can simply isolate itself from some or all other countries for the duration of the attack and guarantee unhindered traffic in its own country.
TCP/IPx
Kenz300 on Sat, 17th Sep 2016 8:52 am
The oil companies and the auto companies need to get their collective heads out of the sand and realize that the world is changing with or without them.
Climate Change is real….. it will impact all of us…
It is time to move away from fossil fuels and embrace alternative energy sources like wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste. They need to change their business models and move from being OIL companies to ENERGY companies. The auto industry needs to move from just building compliance vehicles to embracing electric vehicles and start putting development and advertising behind them..
The world is moving to embrace alternative energy sources…….. the fossil fuel companies can transform themselves into “energy” companies or they can die a slow death.
As Climate Change impacts more people there will be a bigger backlash against fossil fuels.
Solar Cost Hits World’s New Low, Half the Price of Coal
http://www.ecowatch.com/solar-price-chile-1982242311.html
Renewable Energy Generation Breaks Records Every Month in 2016 – EcoWatch
http://www.ecowatch.com/renewable-energy-breaks-records-1987755555.html
Watch The Climate Change Ad Fox News Didn’t Want Its Viewers To See
http://www.huffingtonpost.com/entry/climate-change-ad-fox-news_us_57892a37e4b03fc3ee50c207?section=
Exxon’s Climate Change Cover-Up Is ‘Unparalleled Evil,’ Says Activist
http://www.huffingtonpost.com/entry/exxon-evil-bill-mckibben_561e7362e4b028dd7ea5f45f?utm_hp_ref=green&ir=Green§ion=green
The Effects Of Growth: Sprawl & Development – YouTube
https://www.youtube.com/watch?v=UA33sraoyCk