For the United States and other net importers of oil, the past two years have the dubious distinction of featuring the highest average annual crude oil prices, in both real and nominal terms, since the beginnings of the modern oil industry in the 1860s. Such elevated prices for oil, marked by extreme volatility at times, pose risks to the still-anemic U.S. and global economies, even though they have proven a boon to the domestic oil industry and the regions of the country where oil and gas are produced. Still, the U.S. economy is much less affected by changes in oil prices today than it was in the 1970s, for instance, when the first modern oil crises wreaked havoc on the national economy.
Understanding how oil prices affect the economy of the United States is crucial to sensible domestic policymaking. The consequences of the dramatic collapse in oil prices in 2014, for instance, vary tremendously across the country's geographic regions, economic sectors, and population segments. Pinpointing the exact dynamics at play, as well as measuring their magnitudes, is difficult to do with precision. But several decades of research have yielded critical insights. These findings can help inform policy decisions in realms as diverse as economic sanctions, strategic petroleum reserve releases, and gasoline taxes, limiting any negative implications their effects on oil prices might cause to the broader economy and maximizing their potential benefits.
One of the policy tools that many countries have at their disposal as a means of mitigating harmful spikes in oil prices is releasing oil from strategic reserves. The major oil release undertaken in 2011, coordinated by the IEA, provided policymakers with valuable lessons about three critical aspects of these emergency interventions: (1) their effect on oil prices and market perception, (2) their implications for international cooperation, and (3) the logistical issues they raise about the U.S. Strategic Petroleum Reserve (SPR). Energy officials in IEA countries should bear in mind those market-imposed constraints when structuring future releases, tailor their cooperation with influential oil-producing and -consuming countries to evolving geopolitical realities, and address potential operational impediments to the U.S. SPR, informed by the experience of the 2011 release.
HOW DO OIL PRICES AFFECT THE U.S. ECONOMY?
The primary channel through which higher oil prices reduce U.S. economic activity is by squeezing consumers, taking away discretionary income.