Rising oil prices, once a big negative, may now be 'a wash' for the US economy

  • The rise of the United States to become the world's second-largest oil producer has changed the calculus for how rising energy prices affect the economy.
  • What once would have been a massive surge in the oil trade deficit, which would subtract from gross domestic product, is now offset to a large degree by U.S. oil exports.

In a significant shift in thinking, several economists contacted by CNBC now believe a rise in oil prices may not produce very much, if any, drag on U.S. growth.

Some even contend that the nation's new oil-producing prowess make a rise in prices "a wash" for growth.

This is a complete about-face for old metrics where it was practically automatic for economists to mark down growth when oil prices rose.

But the rise of the United States to become the world's second-largest oil producer has changed the calculus for how rising energy prices affect the economy. Consumer pain at the pump is now seen as an offset to an extent by increases in capital spending by U.S. oil companies and by gains in the growing number of regions producing energy. And what once would have been a massive surge in the oil trade deficit, which would subtract from gross domestic product, is now offset to a large degree by U.S. oil exports.

"We think the effect will round to a wash,'' said Michael Feroli, chief U.S. economist with J.P. Morgan Chase. "Our prior modeling would likely have produced a slightly more adverse impact, perhaps annualizing to a quarter point off growth for two consecutive quarters."

Now, Feroli sees a roughly 0.2 percent decrease from lower consumer spending offset by a 0.2 percent gain in capital spending.

To be sure, economists contacted by CNBC said they could not be sure if the positives would offset the negative at any oil price. A return to prices over $100 a barrel could overwhelm the consumer and exert a strong negative drag on the overall economy.

In addition, oil has an outsized effect on American consumers' psyche, beyond the actual costs. A sustained period of $3 a gallon for gasoline could weigh on confidence and spending. Finally, there could well be a mismatch in the timing of an offset to lower consumer spending from capital spending so that one quarter shows a drag while the next one exhibits a boost.

John Ryding of RDQ Economics is not quite ready to say it's a wash, but he offered: "You're not looking at the kind of magnitude that we used to think about oil prices hurting the U.S. I think that it's less than a third of the impact that it used to be."

Ryding said the biggest issue will be one of distribution. Higher oil prices amount to a wealth transfer from consumers to shareholders, and from oil-consuming regions to oil-producing regions. But this time, a lot more of the money will stay within American borders with the question of how petrodollars get divided inside the country.

J.P. Morgan searches for errors

The rethink of the oil price impact is borne of the recent decline in prices in 2014 and 2015 and its failure to boost the economy. J.P. Morgan in a research note did what few economists do these days: They went back and looked at their errors.

It found the oil price impact on consumer spending ended up being 0.7 percent less than what it would have expected, and the drag from capital spending was 0.2 percent more. Put simply, lower oil prices added less to consumption and took away more from investment than the old forecasting metrics would have implied.

Some Federal Reserve officials have learned the lesson. St. Louis Federal Reserve President James Bullard told CNBC on Monday that the negative consumer effects and the positive investment effects "more or less washes out."

"This will also encourage U.S. production, and compared to years past, oil prices have a more neutral effect on the U.S. economy,'' Bullard said. "It used to be a big oil shock was probably bad news, … but now I think it's neutral."

A key to the offset is whether and by how much companies step up to invest. Many investors and lenders were burned in the last price runup so the sector could have some difficulty attracting long-term capital. And, productivity continues to improve in the oil sector, meaning fewer rigs are needed to extract the same amount of oil as even five years ago. Finally, some of that capital equipment will be imported, a drag on the U.S. trade deficit that will offset at least some of the surge in oil exports.

But that's at the margin of a stark change in the U.S. energy profile. U.S. oil production has surged from a low of 4.6 million barrels a day in 2005 to a new record high of 10 million bpd. It's risen 13 percent in just the past year, following the price of oil higher.

Importantly for balance of payments, the result of more U.S. production is a sharp decline in imports, which have fallen by 42 percent in real dollars since 2005, while exports are up 318 percent. That is, they have gone from a basically a negligible amount to a meaningful offset to imports.