ECONOMIC REPORT OF THE PRESIDENT

Box 2-1: Impact of Oil Price Declines on Spending and Production
The United States is a net importer of oil, so a decline in oil prices
is generally expected to boost domestic real income and lower incomes
in countries that are net exporters of oil, such as Saudi Arabia and Russia.
Yet, U.S. net oil imports have fallen 63 percent in the last ten years due
to both greater domestic production and lower consumption, so the U.S.
economy is less sensitive to oil price movements today than in the past.
Moreover, the direct impact of oil price changes on energy consumers
and energy producers moves in opposite directions. The overall impact
of oil price changes also depends on the sources of those price changes.1
For example, if oil prices fall due to lower demand in a weakening global
economy, this is likely to also coincide with a reduction in U.S. GDP
growth, but it would be incorrect to infer that the oil price decline itself
hurt U.S. GDP growth. In contrast, if the price of oil falls due to an
increase in oil supply, such as from technological advances in oil extraction
or improving geopolitical conditions in oil producing countries,
lower oil prices would tend to increase U.S. GDP. This box analyzes the
direct impact of the fall in the price of oil from mid-2014 to late 2015 on
the U.S. economy, an exercise that is most informative when the oil price
declines are driven primarily by an increase in oil supply.
Overall, CEA estimates, as shown in Table 2-i, that the decline
in oil prices had the direct impact of boosting real GDP growth by 0.1
percentage point during 2014 and 0.2 percentage point during 2015.
Considerable uncertainty surrounds these estimates of the direct effects
of the oil price decline, and moreover, these estimates exclude indirect
effects.
The boost to output and consumption from lower oil prices is
largely due to the lower cost of imported oil. U.S. net imports of petro-
Table 2-i
Estimated Impact of Oil Price Declines on Output, 2014–2015
Growth (Q4-to-Q4)
2014 2015 Cumulative Level
Total Impact 0.1 0.2 0.3
Contribution from:
Consumption (via imported-oil savings) 0.1 0.5 0.6
Drilling and mining investment 0.0 -0.3 -0.3
Source: CEA calculations; Bureau of Economic Analysis; Energy Information Administration.
1 See also Hamilton (2003) and Kilian (2014) for differing empirical assessments of the
source of oil price shocks since the mid-1970s and how oil price shocks have affected the
economy.
The Year in Review and the Years Ahead | 55