OIL PRICES: NOT AS IMPORTANT AS WE THOUGHT?

As you can imagine, oil prices are thought to have a big effect on the economy. When prices rise, that tells us that oil is scarce relative to demand, and therefore that we can make and consume less stuff than we’d like to. When prices fall, we are lolling about in unexpected bounty. A new paper by economists Christiane Baumeister and Lutz Kilian attempts to estimate just how big an effect the recent sharp decline in oil prices has had on the gross domestic product of the U.S. Their answer is … none.

Um, what? Come again?

That’s right, none. There was a stimulative effect on the consumer side, but it was offset by the loss of investment in the oil sector. . . .

If you’re a consumer who felt the pain of high gas prices, and breathed a sigh of relief when they finally dropped, this may seem surprising. But on a larger scale, whether high oil prices are good or bad for your economy depends on whether it’s a net importer or a net exporter. No one finds it hard to believe that falling oil prices were bad for big oil producers like Venezuela (and they were!). Conversely, if you’re a country that uses a lot of oil, and doesn’t produce any, it’s pretty obvious that higher oil prices will hurt, and lower ones will be good. What’s interesting is that, thanks to the shale oil boom in the U.S., this paper finds those two forces roughly balancing out.

It’s also interesting to ask what this could tell us about the coming election.

You can often do a surprisingly good job at predicting the outcomes of presidential races knowing only a few simple things about the economy. And yet, the models don’t all agree. The oldest prediction model, which is based on economic as well as non-economic indicators, has Republicans taking the White House. A Moody’s economist, on the other hand, says that for its model, which shows Hillary Clinton taking 326 votes in the electoral college, “The tie-breaker as of today is really gasoline prices.”

Yet that should show up in the polls, and right now, the polls aren’t showing us a comfortably dominant Clinton lead. This Baumeister-Kilian paper might give us some clue as to why: When America was a net importer of oil, gas prices might have had a substantial effect on elections, but that changed in recent years. The shale oil boom meant that even back when a lot of households were feeling pinched by higher fuel prices, people working in the oil industry, and associated firms, were made much better off. So the effect on the economy became less clear, and so did the effect on elections.

That’s the problem with established models. They stay the same, while the world changes.