From The Wall Street Journal

The effect of oil prices on the U.S. economy used to be straightforward: Higher was bad. Yet between 2014 and early 2016, as oil collapsed, growth slowed sharply. Since then oil has doubled, yet the economy has accelerated.

Credit this to the emergence of the U.S. as a leading oil producer and, soon, net energy exporter. More expensive oil is still a tax on consumers. But that tax is increasingly offset by the boost to energy investment, production and jobs. The U.S. business cycle is thus now tied in complex and surprising ways to the global oil market.

The rise in U.S. oil production, thanks to shale, is nothing short of spectacular. The federal Energy Information Administration projects that daily output, which was the highest since 1972 last year, will rise to a new record of 10.6 million barrels this year. BP PLC’s latest world energy outlook predicts the U.S. will account for 18% of world oil and related liquids output in a little over two decades, well ahead of second-place Saudi Arabia at 13%.

Even more consequential: The U.S. deficit in crude oil and refined products has shriveled to four million barrels a day last year from 12 million in 2007. The EIA predicts the U.S. will become a small net exporter by 2029, and if all other energy is included, in just four years.

The U.S. has plentiful reserves of “tight” oil—primarily brittle rock formations such as shale—that was unprofitable to extract until the adoption of seismic imaging, hydraulic fracturing of rock and horizontal drilling in the mid 2000s. It now accounts for more than half of U.S. crude output.

Oil’s share to U.S. gross domestic product, at 2.7%, is only marginally above its three-decade average and nowhere near as important as in true petrostates such as Russia and Saudi Arabia. But it plays an outsize role in year-to-year growth fluctuations because shale drillers, who don’t have to spend years looking for new deposits, respond so quickly to market conditions.

The Petro-Economy

As U.S. oil production and exports have soared, energy investment has become a driver of economic growth and factory shipments.

Indeed, a recent study by Richard Newell, president of the think tank Resources For the Future, and Brian Prest of Duke University finds shale output rises nine times as much as conventional output for a given price rise, for two reasons: More wells are drilled, and each well is far more productive. (That advantage declines over time, as shale wells are exhausted more quickly.)

Each new well drilled triggers related demand, from pumps and fabricated metal to truckers. The reverse is also true. Rob Martin, an economist at UBS , estimates that after oil prices tanked in 2014, collapsing energy investment wiped a full percentage point off growth in 2015 and nearly half a point in 2016. Then as oil prices recovered, energy investment contributed 0.6 points to last year’s 2.5% growth.

This is a sharp contrast to historic patterns. When oil prices plunged in 1998 because of the Asian financial crisis, U.S. growth got a boost. When they skyrocketed in 2008, it pummeled an economy already wilting from the mortgage crisis.

Mr. Martin also found oil has had a huge influence on manufacturing. By the end of 2015, near the nadir of prices, shipments of manufactured goods potentially tied to commodities such as fabricated metal products, construction machinery and heavy-duty trucks were down 12% from a year earlier. As oil activity recovered, they turned and by late last year were up 9%.

Not all of this was homegrown. American manufacturers also benefited from recovering activity in foreign oil producers. Nonetheless, it left an imprint on regional growth. From mid-2016 through the middle of last year, more than half the net U.S. jobs created in manufacturing were in Texas, home of the tight oil-rich Permian Basin, according to UBS.

Since mid-2017 that effect has moderated as the recovery in both business investment and factory jobs has spread beyond energy. Nonetheless, Mr. Martin predicts that energy investment will contribute a tenth of the 2.9% growth rate projected for the U.S. this year.

Many crosscutting forces will determine if oil continues to exercise the same influence over the business cycle. The decision by the Organization of the Petroleum Exporting Countries and Russia to curb output a few weeks after Donald Trump was elected president in 2016 was particularly advantageous to American producers, who benefited from both a higher price and an expanded market share. OPEC and Russia may not hold back as stronger global growth propels demand.

Shale producers are also dependent on fickle stock and bond markets to finance operations and the uncertain pace at which extraction technology improves. The recent surge in stock market volatility dragged down oil prices.​

Bob McNally, president of Rapidan Energy Group, a consulting firm, warns the last price bust depressed global oil investment while ensuring U.S. gasoline consumption will keep rising, contrary to the EIA’s prediction of an imminent peak. As global growth picks up, global oil supply will be slow to respond, which Mr. McNally said is a recipe for oil to top $100 per barrel and gasoline to hit $4 a gallon, with the usual pain for consumers and the broader economy.

So oil hasn’t lost its capacity to hurt. But its capacity to help will be an important and unpredictable force for at least a few years yet.

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