Photographer: Shane Bevel/Bloomberg

Turns Out That Oil Prices Don't Matter

Import costs used to hurt. But these days the U.S. produces so much oil that a boom has a mixed impact, and so does a bust.

Oil is not just the fuel that runs our cars. It’s also the fuel that runs our economies.

Petroleum is a feedstock for plastics and petrochemicals. It provides heat and electricity. And of course, it provides the primary means by which we move all of the goods we produce, and the workers who produce them, and the consumers who consume them. It is a critical member of a class of product that economists call “intermediate goods” -- goods that are used to produce other goods and services.

As you can imagine, oil prices are thought to have a big effect on the economy. When prices rise, that tells us that oil is scarce relative to demand, and therefore that we can make and consume less stuff than we’d like to. When prices fall, we are lolling about in unexpected bounty. A new paper by economists Christiane Baumeister and Lutz Kilian attempts to estimate just how big an effect the recent sharp decline in oil prices has had on the gross domestic product of the U.S. Their answer is … none.

Um, what? Come again?

That’s right, none. There was a stimulative effect on the consumer side, but it was offset by the loss of investment in the oil sector. They write:

Our analysis suggests that this decline produced a stimulus of about 0.7 percentage points of real GDP growth by raising private real consumption and an additional stimulus of 0.04 percentage points reflecting a shrinking petroleum trade deficit. This stimulating effect, however, has been largely offset by a reduction in real investment by the oil sector more than twice as large as that following the 1986 oil price decline. Hence, the net stimulus since June 2014 has been effectively zero.

If you’re a consumer who felt the pain of high gas prices, and breathed a sigh of relief when they finally dropped, this may seem surprising. But on a larger scale, whether high oil prices are good or bad for your economy depends on whether it's a net importer or a net exporter. No one finds it hard to believe that falling oil prices were bad for big oil producers like Venezuela (and they were!). Conversely, if you’re a country that uses a lot of oil, and doesn’t produce any, it’s pretty obvious that higher oil prices will hurt, and lower ones will be good. What’s interesting is that, thanks to the shale oil boom in the U.S., this paper finds those two forces roughly balancing out.

It’s also interesting to ask what this could tell us about the coming election.

You can often do a surprisingly good job at predicting the outcomes of presidential races knowing only a few simple things about the economy. And yet, the models don’t all agree. The oldest prediction model, which is based on economic as well as non-economic indicators, has Republicans taking the White House. A Moody’s economist, on the other hand, says that for its model, which shows Hillary Clinton taking 326 votes in the electoral college, “The tie-breaker as of today is really gasoline prices.”

Yet that should show up in the polls, and right now, the polls aren’t showing us a comfortably dominant Clinton lead. This Baumeister-Kilian paper might give us some clue as to why: When America was a net importer of oil, gas prices might have had a substantial effect on elections, but that changed in recent years. The shale oil boom meant that even back when a lot of households were feeling pinched by higher fuel prices, people working in the oil industry, and associated firms, were made much better off. So the effect on the economy became less clear, and so did the effect on elections.

While the pain of high oil prices was probably more widespread than the joy, the pain of falling oil prices was probably more intense than the relief of cheaper gasoline, because losing your job is a lot worse than having to economize on driving. And while numbers matter in politics, intensity matters too. That’s why the National Rifle Association tends to win on gun issues, even though polling often shows the public disagrees with its positions.

Working is another central component of the identities of many Americans, an issue that’s probably powerful enough to move them to the polls all by itself. So just because the effects of oil come out in the economic wash, doesn’t mean that they will also disappear from our politics. I could tell two stories about this election: one in which low gasoline prices will help Clinton, because there are a whole lot of people in this country who drive, and one in which they help Donald Trump, because the folks who were thriving on the high oil prices are probably really miserable and ready for a change. I don’t know which of these stories is right, and I won’t until election day.

Or perhaps not even then. For the effects of all the variables in all the models may be swamped by something that no one predicted: the historically unprecedented emergence of two major-party candidates so unpopular that it’s less a matter of who the public wants to win, than who they’d rather see lose.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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