Back in late 2014, when oil prices tumbled after the OPEC “thanksgiving massacre“, the conventional narrative was that dropping oil prices were a boon for the economy as they resulted in lower gas prices and thus greater discretionary income. The stark reality emerged quickly, however, once US corporations halted capex spending, resulting in a mini-recession for business investment coupled with dozens of shale bankruptcies.

Fast forward 4 years when Brent oil prices are trading back near $85/barrel, their highest level since October 2014, right before they tumbled. And with the “lower oil is beneficial for GDP” narrative discredited, following the recent rally, questions about the economic impact of oil prices have resurfaced, among them: have higher oil prices contributed to the upside surprises to 2018 growth via higher energy capex, as Chairman Powell suggested last week? Can US shale further ramp up production when capacity constraints are looming? Do higher energy prices still exert a meaningful drag on consumer spending and boost core inflation in an era of increased energy efficiency?

This is an analysis that Goldman conducted this week, and found that higher oil prices have had a neutral impact on GDP growth so far this year with a -0.25pp contribution from lower real consumption roughly offset by a +0.25pp contribution from higher energy capital spending. However, if oil prices remain at their current level the net growth contribution will decline to -0.1pp to -0.2pp in 2018Q4 and 2019H1.

The key reason is that while higher oil prices will remain a steady drag on consumption growth, the boost to energy capex is likely to shrink as the shale industry runs into transportation capacity constraints. It is only in 2019 H2 that the eventual arrival of new pipelines will likely trigger a re-acceleration of energy capital spending.

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