I may be doing some media where people will ask me about what the oil plunge means for the US economy, so I thought I’d spend a bit of time figuring out what if anything I might say that’s interesting. And it does seem to me that there’s a bit more to the story than a casual pass might suggest.
The big news prior to the plunge was, of course, fracking and all that, which has abruptly reversed the long slide in domestic production:
You might think that this surge in production, by reducing imports, has left the US relatively insulated from oil shocks. But we do need to remember that on the eve of the latest plunge real oil prices were very high by historical standards, so that oil imports as a share of GDP remained quite high — in fact, early OPEC high:
So the economic impact might be bigger than you think. But shale has in some important ways arguably changed the nature of that impact.
Because we once again have a significant sized domestic oil industry, falling prices now create losers as well as winners within the US. The gains from falling prices exceed the losses, and if the marginal propensity to spend is similar that should tell the tale for aggregate demand. In fact, in the old days when domestic oil largely meant Texas billionaires and all that, it was reasonable to argue that the internal redistribution further increased demand when oil fell.
But fracking (which I really wish WordPress would stop correcting to “tracking”) means that some of the producers are very different; and among other things, they’re engaged in a lot of investment spending. So you could make the case that falling oil is less expansionary than it used to be, and even, possibly, that it’s contractionary.
This is just a, um, crude first pass. But there may be more here than the pure terms of trade effect.