What Is the Impact of Oil Supply Shocks on Employment?

As anyone who owns a car knows well, the price of oil can be extremely volatile. But do sudden shocks in the supply of oil affect something like jobs? In a December Regional Economist article, Bill Dupor, an economist and senior economic policy advisor at the St. Louis Fed, examined the relationship between oil and employment.

Dupor first looked at the nominal price of U.S. oil over nearly six decades, as shown in the FRED chart below that spans the period from 1966 to November 2022. He noted that sharp jumps in the price of oil often preceded a recession, pointing out two recessions that followed oil supply shocks in 1973 and 1979.

“On the other hand, oil price increases are not always associated with economic downturns,” he wrote. “If oil supply factors are stable, then increased oil demand—perhaps due to an improving global economy and economic outlook—can drive up oil prices.”

He noted that the U.S. and other nations experienced sustained economic growth from 2002 to 2007 despite rising oil prices.

“Economists want to know the effect of oil supply changes on economic activity,” he wrote. “Uncovering that effect requires the researcher to disentangle how much of a price movement is supply versus demand driven.”

An analysis of supply and demand curves can provide useful insight into different results created from shifts in the supply curve versus shifts in the demand curve. (For the author’s full analysis of the supply and demand curves, see his Regional Economist article.)

However, in the real world, the movements of these curves are constant and unpredictable, making it difficult to sort out which factors are affecting prices and quantities.

Identifying Oil Supply Shocks

The author cited the work of economist Diego R. Känzig, who examined oil price changes shortly before and after meetings of the Organization of the Petroleum Exporting Countries (OPEC). Dupor noted Känzig found that negative news about supply that comes out of these meetings hikes oil prices immediately and results in a gradual decline in oil output.

“Of course, these shocks are a very small fraction of the many factors moving oil prices, but their value lies in the fact that isolating them allows economists to measure the impact of a fairly pure supply shock on other variables,” Dupor wrote.

Oil Supply Shocks and Employment

Do these oil supply shocks affect employment? Dupor pointed to a 2022 working paper that looked at the relationship between oil and jobs. The paper, which he co-authored with economists Timothy Conley and Mahdi Ebsim, focused on jobs in manufacturing—since the industry is especially dependent on petroleum—and contractionary supply shocks.

“In response to a 20% increase in the price of oil driven by a contractionary supply shock, we estimated that manufacturing employment fell by 1% over an 18-month horizon,” Dupor wrote. “Over a two-year horizon, the effect was slightly smaller, with manufacturing employment falling by 0.8%.”

Still, Dupor noted that this impact on jobs was relatively small.

“One potential reason is that we estimated the response over a relatively recent period: January 1991 to January 2017,” he wrote. “Oil has likely diminished in its importance for the U.S. economy relative to the 1970s because the U.S. has become dominated by the service sector and other sources of energy have gained prominence.”