The US economy's response to adverse oil supply news has fundamentally changed since it became a net exporter of petroleum in 2019, according to a paper presented at the Brookings Papers on Economic Activity (BPEA) conference. Sharp increases in global oil prices, which historically preceded US recessions, now tend to boost US economic activity. This shift is attributed to the shale revolution, which increased US crude oil production from roughly 5 million barrels per day in the late 2000s to almost 14 million barrels per day by 2025, significantly reducing net imports.
A rise in oil prices now generates domestic income and wealth gains that support industrial production and household spending. While the oil industry experiences the largest direct benefits, these gains spread across various sectors including manufacturing, construction, trade, and services, and even favorably impact the stock prices of transportation firms and airlines. Employment outside the mining sector also sees similar increases in both oil-producing and non-oil-producing states.
Despite the overall positive aggregate impact on the US economy, consumers still face higher prices at the pump, with gas prices rising from just under $3 a gallon before the Iran war to approximately $4.50, and diesel prices hitting over $6.50. This has contributed to inflation, with the Consumer Price Index (CPI) rising from 2.4% to 3.4% since the war began. The Federal Reserve has responded by raising interest rates, a move that is now more feasible as oil shocks on net boost economic demand rather than contracting it, allowing policymakers to counter inflationary pressures more aggressively. The 10-year Treasury note yield has also climbed from 3.96% to nearly 5%, and average 30-year mortgage rates have increased from less than 6% to over 7%.
Research from the Dallas Federal Reserve indicates that the US economy is significantly less vulnerable to geopolitical oil supply disruptions than in the past. A global oil supply disruption today would cause only one-twentieth of the decline in annualized US real GDP growth compared to a similar event in 1980 (a 0.3 percentage point decline versus 5.6 percentage points). The US response to such disruptions is now also only one-sixth of the decline observed in the rest of the world. This resilience is due to reduced dependence on oil and the shift to net exporter status, with oil and oil product expenditures as a share of GDP falling from a high near 8% in 1980 to 3% in 2024.
While the stock market has shown resilience, largely fueled by AI investments, it has stagnated recently, potentially indicating investor concerns about the prolonged conflict in Iran. However, the OECD noted that the global economy has been more resilient to the Iran war than expected, partly due to the release of global oil stockpiles, reduced energy imports by China, and a shift to alternative fuels. Despite this, the resurgence in oil and gas prices continues to pose risks for the coming months.
