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Remember the 1970s Oil Crisis? This Isn't That
Oil Shocks Have Smaller Impact on U.S. Than 1970s, Fed Study Finds
Key Takeaways:
- Federal Reserve Bank of Boston researchers said domestic oil production has reduced the impact of energy-price shocks on U.S. inflation and unemployment since the 1970s.
- The study found a current oil shock would raise the PCE price index by 1.5 percentage points versus 2.2 in the 1970s, while employment effects have largely disappeared.
- The authors said monetary policy should now focus more on inflation than employment effects, as oil-producing states can gain jobs even as others experience losses.
Domestic production of oil has significantly reduced the impact of energy price shocks on U.S. inflation and unemployment since the 1970s, according to new research from the Federal Reserve Bank of Boston.
An oil shock like the one resulting from the Iran war should boost the personal consumption expenditures price index by 1.5 percentage points over the subsequent year, versus 2.2 percentage points in the 1970s, Boston Fed researchers said in the study, published June 4.
Job growth, meanwhile, would have been reduced by 1.8 percentage points in the face of such a shock in the 1970s, but that effect “has largely disappeared in recent years,” they said.
For the authors — which include the bank’s top economist, Egon Zakrajšek — that means “monetary policy should focus more on the inflation effects associated with oil shocks as opposed to the employment effects,” in part because “smaller employment effects could result in less disinflationary pressure to counterbalance the inflationary impact of higher oil prices.”
Higher energy costs have a muted impact on employment now because states where oil production is concentrated — such as New Mexico, North Dakota, Alaska, Oklahoma and Texas — can see job gains even as others record losses, according to the study.
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Federal Reserve Bank of Boston
The Boston Fed researchers found relative job growth in Texas could rise by about 1.7 percentage points in such a scenario as the current oil shock, while Massachusetts could see relative employment decline by about 0.4 percentage point.
