How sensitive is the U.S. economy to rising oil prices? A popular view is that growing U.S. energy output has largely immunized the economy against the adverse effects of pricier oil. As evidence of this decrease in sensitivity, many point to the 2014–2016 experience, when a collapse in oil prices did not lead to the expected material rebound in economic activity.
While we agree that the U.S. economy’s overall sensitivity to oil prices has evolved, in large part due to a rapidly shrinking energy trade balance, we caution against extrapolating too much from the 2014 experience. In the near term, diminished pipeline capacity and other bottlenecks will likely curb the acceleration in investment growth that would otherwise accompany higher oil prices.
As a result, we expect the recent rise in oil prices to be a modest headwind to U.S. economic activity while supporting inflation.
Read more at Advisor Perspectives.
Photo: Ed Schipul