This report examines estimates of and approaches to quantifying the costs of U.S. dependence on oil.
January 29, 2018
minute read time
This research was led by Resources for the Future (RFF) with funding from the U.S. Department of Energy (DOE) and the Sloan Foundation. Part of the DOE funding came from the Office of Energy Efficiency and Renewable Energy’s Strategic Priorities and Impact Analysis Team. Funding also came from DOE’s Office of Energy Policy and Systems Analysis.
The RFF report develops new estimates of the relationship among gross domestic product (GDP), oil supply and price shocks, and world oil demand and supply elasticities; translates them into oil security premiums using a welfare-theoretic-based computational model; and compares all these estimates with those in the literature. Two relevant major changes have occurred in recent years: (1) Both the U.S. economy and the world oil market are now more resilient and (for the United States) less reliant on imports than a decade or two ago, and the U.S. economy is less dependent on oil in general. (2) Macroeconomic modeling has become more sophisticated, with advances coming from modeling dynamic economic relationships using dynamic stochastic general equilibrium (DSGE) models, and from extracting macroeconomic oil price shocks from time series data using structural vector autoregression (SVAR) models. These new tools enable an updated assessment of this relationship.
The researchers find a wide range of estimates of the elasticity of GDP to an oil price change and the short-run price elasticities of supply and demand. They also find that world oil demand is more elastic in the short run than previously estimated. The researchers conclude that the implication is that the oil security premium is lower than that in the bulk of existing literature, and that these values provide evidence that the changes in the economy are at least partly responsible for the lower values.