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- Are Oil Price Declines Good for the Economy?
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| Are Oil Price Declines Good for the Economy? Posted: 12 Feb 2015 02:00 AM PST Are Oil Price Declines Good for the Economy?
As expected, falling crude oil prices lead to falling gasoline prices and lower inflation. Since mid-June, the spot price of the U.S. benchmark for crude oil, West Texas Intermediate (WTI), has fallen from a bit less than $108 per barrel to a bit less than $50 per barrel—a decline of more than 50 percent. Much of the economic research on the effects of crude oil prices on the macroeconomy has focused on the effects of oil prices: Sharp increases generally have a negative effect. In fact, oil price increases have preceded 10 of the past 11 U.S. recessions. 1 But do falling oil prices, overall, have positive effects on the macroeconomy? Here the research is less conclusive: Some researchers argue they don't and some argue they do.2 In general, though, as with rising oil prices, the effects depend on the source of the shock affecting the supply or demand. Falling oil prices have numerous effects—some positive and some negative. On the positive side, lower oil prices tend to lower overall inflation and, to some extent, measures of inflation expectations. All else equal, lower inflation and inflation expectations tend to lower nominal interest rates and may spur increased demand for interest-sensitive durable goods such as automobiles and housing. Lower oil prices also help to reduce operating expenses of the transportation sector and other industries that are relatively large users of gasoline, diesel, and jet fuel. There is also evidence that lower oil price volatility is associated with increased capital expenditures by businesses. On the negative side, lower oil prices reduce the extraction and drilling incentive for producers, which has become more important in recent years since the United States has become a large crude oil producer. Reduced drilling activity has an immediate effect on industrial production and, ultimately, on nonresidential fixed investment.3 Although drilling activity remained high for a few months after oil prices peaked and began to decline, the number of rotary rigs drilling for crude oil in the United States has declined by about 23.3 percent since mid-October 2014.4
The table also shows the average peak-to-trough changes in gasoline prices, as measured by the consumer price index, and changes in the growth of industrial production, real personal consumption expenditures (PCE), and PCE inflation. Growth of the last three indicators is measured on a 12-month percent change basis. On average, the peak-to-trough decline in oil prices averages 34.4 percent. As expected, falling crude oil prices lead to falling gasoline prices (though not of the same magnitude) and to lower inflation. Falling oil prices also tend to lead to faster growth of real consumer spending. Yet, growth of real industrial production declined by about 0.3 percent during these five episodes of falling oil prices. The bottom half of the table shows the same variables for the current period; data are available only through December 2014. The pattern seen in previous episodes generally holds, though in the current episode the growth of industrial production has instead strengthened. In conclusion, significant declines in oil prices during expansions appear to be a net positive for the economy. ~~~
NOTES 1 For a recent summary of the research, see Engemann, Kliesen, and Owyang (2011) and the references therein. 2 Mork (1989) was the first to find empirical evidence of the asymmetric effects of oil prices—that is, increases in oil prices matter more to the macroeconomy than decreases in oil prices. Hamilton (2008), a noted proponent of asymmetry, argued that most post-World War II recessions were preceded by rises in oil prices. Killian (2009) argues that the effect of oil price changes on the macroeconomy depends on the source of the disturbance to oil supply and demand. 3 See the FRED® Blog on oil prices and business fixed investment in structures:http://fredblog.stlouisfed.org/2014/10/oil-prices-and-business-fixed-investment-in-structures/. 4 The oil rig count data are available from Baker Hughes: http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother. 5 The RAC is the composite measure—that is, based on the price of crude oil purchased from domestic and foreign sources. The RAC is commonly used as the oil price in large-scale econometric forecasting models. REFERENCES Engemann, Kristie M.; Kliesen, Kevin L. and Owyang, Michael T. "Do Oil Shocks Drive Business Cycles? Some U.S. and International Evidence." Macroeconomic Dynamics, November 2011, 15(Suppl. 3), pp. 498-517. Hamilton, James D. "Oil and the Macroeconomy," in Steven N. Durlauf and Lawrence E. Blume eds., Palgrave Dictionary of Economics, 2nd edition. Palgrave Macmillan, 2008. Killian, Lutz. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market." American Economic Review, June 2009, 99(3), pp. 1053-69. Mork, Knut Anton. "Oil and the Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results." Journal of Political Economy, June 1989, 97(3), pp. 740-44.  |
| The Unreasonable Effectiveness of Math Posted: 11 Feb 2015 05:00 PM PST
Brian Cox excitedly explains the unreasonable effectiveness of math
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| The 700 Billion Dollar Company Posted: 11 Feb 2015 12:00 PM PST
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| Posted: 11 Feb 2015 04:30 AM PST Who are all these new faces on my TV? No Williams, no Colbert, and soon no Letterman and no Stewart. No worries, we have you covered with our morning train reads:
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| Posted: 11 Feb 2015 04:13 AM PST Last night, Jon Stewart announced he would not be renewing his contract for The Daily Show. It immediately set off a scramble – who is going to replace him? What might this mean for intelligent, hard-hitting media criticism? And what is Jon going to do in the future? You might think that in this era of Twitter, blogs, user-generated content, et. al., that the mainstream media no longer matters. That is most certainly untrue. In the digital age, the business model of The News might be broken, but the authority and influence of major media outlets such as the New York Times, Wall Street Journal and Washington Post have never been higher. Getting their content seen was the easy part for old line Media; figuring out how to monetize it is the hard part. What made Stewart and the Daily Show required viewing was how they saw through all of the bullshit. They punctured the cocksure hubris of elected officials, business people, institutions — really, any wanker who was both arrogant and, more often than not, completely, hopelessly, utterly, and (best of all) hilariously wrong. TDS may have been the first major media source to push back against the jingoistic run up to the Iraq war (those of you too young to recall, that was the country that did not attack us on 9/11). While the New York Times — the paper of record, mind you — ran front page WMD articles under the byline of the now discredited Judith Miller, TDS revealed the nonsensical propaganda for what it was. Some of the more hypocritical aspects of political jockeying, elections, and business received their finest skewering on the show. They constantly questioned the self-righteous, the foolhardy, the pontificating politicos. Did anything else from the Financial Crisis come remotely close to the moment of catharsis when Jim Cramer laid down to receive his punishment (and that of all financial media) on the show? That’s before we get to the relentless stream of foolishness that is Fox News, the network that actually makes its viewers less informed than watching nothing at all. My interactions with Fox News viewers have led me to theorize that each day of watching the channel shaves off one single IQ point. Speak with someone who has been watching Fox for many years — do the math — and good luck trying to disprove my thesis. It was Stewart who correctly pointed out that, during the Glenn Beck era, amiable blowhard Bill O’Reilly was actually the sole “responsible adult” at Fox; O’Reilly was rationale, at least on a relative Fox scale. This explains exactly how far off the rails that Fox “News” had gone. Sure, they are wildly popular and insanely profitable, but so was cocaine in the 1980s. Perhaps most important of all, Stewart & Co. turned their lens and razor sharp wit on the media as a whole – and found it terribly wanting. Just as the news business was in financial trouble, so too the reporting of news was itself facing an existential crisis. Perhaps this was not merely a coincidence, but a causal relationship. Former Daily Show staffer John Oliver’s HBO show Last Week has taken what Stewart began — using farce and satire to point out serious wrongs in society — and shifted the news/comedy ratio that much closer to actual investigative journalism. It is a hybrid of one part TDS, one part 60 Minutes, and the show is unique and all the better for it. Oh, and they actually make news each week with their reports. Regardless, it will be interesting to see what comes along afterwards. I doubt anything is going to replace Jon Stewart's Daily Show. The worst job in show business might be whoever has to sit in that seat after Stewart. The Daily Show mattered – and that is not a thing you can say about a lot of media, regardless of whether they were of the “new” or “old” variety.
Previously: How I Ended Up On The Daily Show (January 28th, 2014)
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