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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)

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

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  1. The Effects of the Recent Oil Price Shock on the US Economy

  2. 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

  3. Factors • Size of the shock in both level and growth

  4. Oil Prices • The current 65% increase is comparable to the increases in 2000 (although from a very low level of $15) and 2003

  5. 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)

  6. 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”

  7. 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)

  8. 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

  9. Dangers • Even though high prices are predominantly coming from a booming Asia, from the US perspective, it is a supply problem, not Demand

  10. Dangers • The tight oil market gives Saudi Arabia an extreme amount of power (Saudi Arabia is one of the few suppliers with spare capacity)

  11. Dangers • US consumers are extremely vulnerable. Low interest rates have allowed consumers to spend at a level that has outpaced their income.

  12. 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.

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