Impact of oil price volatility on state-level consumption of the United States: The role of oil dependence

Reneé Van Eyden,Xin Sheng,Mark E Wohar,Rangan Gupta

doi:10.1177/0144598721993227

Abstract

In this study, we analyse the impact of oil price uncertainty (as measured by an observable measure of oil price volatility, i.e. realised volatility) on United States state-level real consumption by accounting for oil dependency. We account for both the long- and short-run dynamics of the state-level consumption function using the panel Pooled Mean Group estimator. The analysis makes use of a novel dataset including housing and stock market wealth at the state level covering the quarterly period 1975:Q1 to 2012:Q2, supplemented with an annual dataset up to 2018. We simultaneously estimate the long-run relationship and short-run impact of oil price volatility at the state-level conditional upon their oil dependency. We find that the negative impact of volatility is most severe for the states of Wyoming, Alaska and New Mexico, while the negative impact is least for Illinois, New York and Nebraska. States with lower per capita income and consumption expenditure, notably in the Southeast and Southwest region of the country are exposed to be more vulnerable to the negative impact of adverse developments and uncertainty in the oil market, as they may have less access to a stock of wealth and other means as recourse. Heterogenous responses, therefore, necessitate additional state-level response besides the national response to oil uncertainty.

Highlights

In a recent paper De Michelis et al (2020), inter alia, analysed for the first time the impact of oil price on a panel data set of state-level consumption of the United States (U.S.), by accounting for oil dependency of these states
This paper studies the effects of oil price uncertainty and oil dependency on consumption as proxied by retail sales across U.S states
De Michelis et al (2020) show that benefits from oil price decreases are smaller than the losses from oil price increases across U.S states

Summary

Introduction

In a recent paper De Michelis et al (2020), inter alia, analysed for the first time the impact of oil price on a panel data set of state-level consumption (proxied by registration of new cars) of the United States (U.S.), by accounting for oil dependency (calculated as oil consumed minus oil produced as percentage of oil consumed) of these states They show that the benefits from oil-price decreases are smaller than the losses from oil-price increases across the U.S states. The state-level evidence highlighted the fact that varying oil dependency may imply differences in consumption responses across regions following oil price shocks, when one might expect that common monetary and fiscal policies would drive similar regional responses Against this backdrop, the objective of our study is to analyse the impact of oil price uncertainty (as measured by an observable measure of oil price volatility, i.e., realised volatility) on state-level consumption by accounting for oil dependency. We model both the long- and short-run dynamics of the state-level consumption function using a panel data approach over the quarterly period of 1975:Q1 to 2012:Q2,1 and simultaneously estimate the short-run impact of oil price volatility at the state-level conditional upon their oil dependency

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