AEI Study: Hedging against Sudden Oil Price Increases to Prevent Job Losses

At a time when President Obama is proposing oil and gas offshore drilling off the U.S. coastline, I thought you might be interested in a just released study by AEI adjunct scholar Marc D. Weidenmier, an associate professor of economics at Claremont McKenna College who is also a research associate at the National Bureau of Economic Research.

Since WWII, every recession but one has been preceded by a run in oil prices. In Hedging Against Peak Oil Shocks, Weidenmier studies how increases in the price of oil affect employment and unemployment, both in energy and non-energy producing states.

He finds that:

  • Oil shocks have different effects on energy and non-energy producing states.

  • Residents of non-energy producing states do not fare as well as energy producing states because they do not place enough of their assets in energy stocks that would allow them to hedge against sudden oil price increases.

  • Energy production increases during peak oil shocks help residents in energy producing states moderate year-to-year fluctuations in income (income smoothing), and balance out spending and savings (consumption smoothing).

  • Energy-producing neighboring states benefit from the wealth created during peak oil shocks.

Weidenmier concludes that to avoid the negative effect of sudden oil price increases:

  • Non-energy producing states should increase the share of energy stocks in their investment portfolios.

  • The size of the energy sector expands during a period when oil prices rise while the rest of the economy shrinks. An increase in domestic energy production should protect most Americans from the effects of oil prices hikes by smoothing out incomes and consumption, because the growing energy sector helps prop up other areas in the economy by increasing the demand for goods and services in non-oil industries.

Professor Marc Weidenmier is available for interviews and can be contacted directly at mweidenmier@cmc.edu. For additional help or other media inquiries, please contact Sara Huneke at sara.huneke@aei.org (202.862.4870).

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