The Response of U.S. Investment to Oil Price Shocks: Does the Shale Boom Matter?

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After an unprecedented decline from 2014 to 2016, the real price of oil more than doubled, renewing interest in the effects of oil price fluctuations on the U.S. economy. The oil sector has become increasingly important to the U.S. economy over the past decade, and total U.S. business fixed investment appears to have followed oil investment’s pattern in recent years. This positive correlation between oil prices and U.S. investment growth may be related to the surge in U.S. oil production known as the shale boom.

Nida Çakır Melek explores the effect of unexpected oil price changes (or “shocks”) on U.S. investment and examines whether this effect changed after the shale boom. She finds that U.S. investment has become more responsive to demand shocks and less responsive to oil supply shocks since the shale boom. In addition, she finds that oil investment has become more responsive to oil supply and demand shocks since the boom. Her results suggest that the shale boom led to greater spillovers from the oil sector to the aggregate economy.