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Lower Oil Prices and U.S. Economic Activity

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Abstract

After a period of stability, oil prices started to decline in mid-2015, and this downward trend continued into early 2016. As we noted in an earlier post, it is important to assess whether these price declines reflect demand shocks or supply shocks, since the two types of shocks have different implications for the U.S. economic outlook. In this post, we again use correlations of weekly oil price changes with a broad array of financial variables to quantify the drivers of oil price movements, finding that the decline since mid-2015 is due to a mix of weaker demand and increased supply. Given strong interest in the drivers of oil prices, the oil price decomposition is information we will be sharing in a new Oil Price Dynamics Report on our public website each Monday starting today. We conclude this post using another model that finds that the higher oil supply boosted U.S. economic activity in 2015, though this impact is expected to wear off in 2016.

Suggested Citation

  • Jan J. J. Groen & Patrick Russo, 2016. "Lower Oil Prices and U.S. Economic Activity," Liberty Street Economics 20160503b, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87124
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    Cited by:

    1. Ali Fadul, 2021. "Does Organizational Justice Influence Employee Innovative Behavior in an Arabic Context? Evidence From the Libyan Oil Industry," SAGE Open, , vol. 11(3), pages 21582440211, September.
    2. Kim, Gil & Vera, David, 2019. "Recent drivers of the real oil price: Revisiting and extending Kilian's (2009) findings," Energy Economics, Elsevier, vol. 82(C), pages 201-210.
    3. Soma Patra, 2022. "Oil price shocks, firm entry and exit in a heterogeneous firm model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(1), pages 349-378, February.
    4. Chen, Ruoyu & Iqbal, Najaf & Irfan, Muhammad & Shahzad, Farrukh & Fareed, Zeeshan, 2022. "Does financial stress wreak havoc on banking, insurance, oil, and gold markets? New empirics from the extended joint connectedness of TVP-VAR model," Resources Policy, Elsevier, vol. 77(C).

    More about this item

    Keywords

    VAR models; Oil Prices; Asset Prices; Oil Supply Shocks;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F00 - International Economics - - General - - - General
    • G1 - Financial Economics - - General Financial Markets

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