Sensitivity of the U.S. economy to oil prices controlling for domestic production and imports

Abstract

This paper investigates the sensitivity of U.S. economic performance to oil price changes, accounting for changes in the domestic petroleum supply-demand balance over the last decade. A non-linear (asymmetric) autoregressive distributed lag (NARDL) model is used to estimate the U.S. GDP elasticity with respect to the oil price, controlling for oil production, consumption and imports, and macroeconomic variables. The positive and negative components of the oil price both have statistically significant long-run impacts on the real U.S. GDP. The parameter estimates imply that a 1% positive and permanent oil price shock, all else the same, would have a long-run impact of −0.045% on the U.S. economy (an elasticity of −0.045), but short-run parameters on the positive oil price terms are not significant at the 10% level. The long-run parameter on the negative oil price component term implies an elasticity of −0.034. Thus, controlling for domestic U.S. oil production and oil trade, the long-run oil price elasticity of the U.S. GDP remains within the range of estimates from previous studies. The results also show that domestic oil production and consumption have short-run impacts on the U.S. GDP. The potential extent of interactions among these variables, and implications for the net economic impacts, under an oil price shock are subjects of future research.