The history of low oil prices juicing the U.S. economy was broken during the pandemic-fueled price collapse, Dallas Fed economists argue in a new commentary.
Why it matters: "[O]n balance this oil price decline has weakened rather than strengthened the U.S. economy, making this event different from past episodes of falling oil prices," they write.
What they found: Normally, low gasoline prices stimulate help the economy because people have more money to spend on other things, while high prices act as drag on growth.
- But these are not normal times! "Shelter-in-place policies greatly and almost instantaneously reduce the gasoline expenditure share, thereby limiting the direct effect of lower oil prices on domestic consumers," they write.
The big picture: These tragically strange circumstances followed more structural changes over the last decade as U.S. production soared and petroleum imports declined.
- The growth of the U.S. oil industry means that when it deeply cuts investment, which is happening now, it hits the wider economy.
- That drag on investment "can be large enough to offset any consumption stimulus" from low prices.
- Meanwhile, in most other industries, the downward pressure on production costs from low prices is actually quite small.
The bottom line: "In the current environment, the sharp reduction in capital expenditures by oil companies explains why this oil price decline, on balance, actually hurt U.S. investment spending — and hence, economic growth — not only in oil-producing regions, but overall."