Saudi Oil Attack Is Unlikely to Dent U.S. Economy

The latest drone strikes on Saudi Arabian oil-production facilities likely would have a limited direct effect on the U.S. economy, but could result in higher gas prices, potentially exerting an additional drag on slowing global growth, economists say.

While the total impact of the Saturday attacks remains unknown, analysts say the U.S. economy is very different than it was in the 1970s, when surging oil prices tipped the economy into recession. Oil-price shocks no longer pack the same punch, they say.

Today, energy accounts for about 2.5% of household consumption, down from around 8% in the 1970s, according to Bank of America economists. Since the early 2000s, U.S. energy companies have dramatically ramped up production using new drilling techniques, such as fracking. Oil production doubled between 2008 and 2018, and the U.S. is now the world’s top oil producer, ahead of Saudi Arabia, according to the Energy Information Administration.

The Saudi oil-field attack adds a new factor to consider for Federal Reserve officials, who have been weighing how a variety of geopolitical risks will influence the economic outlook, including the U.S.-China trade war, unrest in Hong Kong and Britain’s impending departurefrom the European Union.

The risks of a chill over business investment and the global growth slowdown are big reasons officials cut their benchmark rate in July and are on track to do so again this week.

Fed officials also will keep an eye on oil prices in the weeks ahead to try to determine how they will affect inflation. They would likely look past a temporary increase in U.S. consumer prices, anticipating a return of inflation to somewhere close to their 2% target.

Fed Chairman Jerome Powell said last month officials on the central bank’s rate-setting committee should set policy with an eye toward minimizing the costs of being wrong. “Because the most important effects of monetary policy are felt with uncertain lags of a year or more, the committee must attempt to look through what may be passing developments and focus on things that seem likely to affect the outlook over time or that pose a material risk of doing so,” he said.

In research published last year, Bank of America estimated that a one-time $20 surge in oil prices would shave only about 0.1 percentage point from economic growth in the short term, some of which would be recovered in following years.

The rise of U.S. oil production means higher energy prices have a much more muted effect on the overall U.S. economy, said Ryan Kellogg, an economist at the University of Chicago.

On the one hand, higher oil prices would hurt consumers and squeeze businesses that rely on energy to make or transport their products. On the other hand, those losses would be offset by the gains the U.S. oil industry would reap from higher prices.

That industry has been in a funk lately as increased energy production and reduced demand have caused prices to sag. On Friday, crude oil futures closed at $54.82 a barrel, down from $76.41 on Oct. 3, 2018.

The industry’s struggles have contributed to a decline in business investment. Private fixed nonresidential investment fell at a seasonally adjusted annual rate of 0.6% in the second quarter, which weighed on the quarter’s economic growth.

A persistent rebound in oil prices could prompt more investment in oil exploration and drilling. But higher energy prices could also reduce fixed investment in energy-intensive manufacturing industries.

“Ten years ago you’d say unambiguously, if there’s a supply shock in the Persian Gulf, this would clearly be a net negative for the U.S.,” Mr. Kellogg said. “Now it’s much more of a wash than it used to be.”

Where surging oil prices would do the most damage is in countries that rely on energy imports, such as China and Japan, the world’s second- and third-largest economies after the U.S.

China produces roughly 4.8 million barrels of oil a day but consumes about 12.8 million, according to the EIA, which makes it heavily dependent on oil imports.

China’s economy has already been under strain from the trade war with the U.S. and a broad global growth slowdown. Higher prices could cause it to slow further, which would reduce Chinese demand for U.S. exports.

The International Monetary Fund said in July a sharp deceleration of trade was slowing the global economy more than it expected. It forecast that global growth, adjusted for inflation, would fall to 3.2% this year, from 3.6% last year and 3.8% in 2017.

The U.S. has so far been spared some of the more serious consequences of the global slowdown. The domestic economy grew at a respectable 2% seasonally adjusted annual rate in the second quarter and Macroeconomic Advisers, a forecasting firm, expects growth will moderate slightly to a 1.9% pace in the third quarter.

If Saturday’s attack results in persistently higher energy prices, it could accentuate the global slowdown.

“To the extent those slowdowns are going to ripple through the trade system, we could see some of those impacts in the U.S. as well,” Mr. Kellogg said.

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