Oil and the economy: evolution not revolution

Abstract

Oil price shocks have had significant effects on the U.S. economy, keeping energy supply, energy policy, and energy security always in focus. The U.S. energy industry has become more efficient and productive, with increased output despite a smaller energy sector. Since the oil price shocks of the 70s, both the impact of oil price shocks and the way we think about them have changed. The impact of an oil price shock on GDP and core inflation is much smaller in magnitude than in the past and depends on the source of the price shock. The recent shale boom in the U.S. has significantly increased oil production to a record high. The short-cycle supply response of shale producers to price changes have trimmed the peaks and troughs of oil prices in the medium term. The shale boom has lowered our dependence on foreign oil and made us less vulnerable to a classic oil supply shock, but we need to contemplate the vulnerabilities that arise from the externalities of our energy use, which will become more critical as we go forward.