A different economic response to higher oil prices
Diego R. Känzig and Luca Zanotti of Northwestern University and James H. Stock of Harvard University link the changing US response to the country's petroleum trade balance. Their research was presented and discussed at the Brookings Papers on Economic Activity Fall 2026 conference on September 24, 2026.
Using data from 1975 through 2025, the researchers compare an adverse oil supply shock at the average US petroleum trade position before 2010 with the response at the 2025 position. The shock is calibrated to raise the inflation-adjusted oil price by 10% initially in the pre-2010 setting.
At the earlier trade position, industrial production declines about 0.6% after a year. At the 2025 position, the estimated response is roughly 1.5 percentage points stronger, turning negative growth into an expansion. The employment and unemployment responses also improve substantially.
Consumer prices, however, rise in both settings, with little change in their response as the petroleum trade balance shifts. The findings suggest that the US can experience oil-related inflation without the same loss of economic activity seen in earlier decades.
What the findings say about the Iran War crisis
Brookings says the study does not examine the still-evolving 2026 Iran War oil shock, but its results imply that the accompanying price increase may not cause a US recession. Oil traded at $72 a barrel just before the war began on February 28, 2026, averaged $117 in April and was around $100 in mid-September.
The scale of the disruption remains substantial. The International Energy Agency describes the near-closure of the Strait of Hormuz as the largest supply disruption in oil-market history. Before the conflict, about 20 million barrels a day passed through the strait; the average for March, April and May fell to 2.7 million. Cumulative supply losses from Middle Eastern producers exceeded 1.3 billion barrels.
Different measures also show how sharply energy costs rose. In early April, the North Sea Dated international crude benchmark hit a record $144 a barrel, more than twice its prewar level, according to the IEA. Jet fuel and diesel recorded even larger increases.
Within two weeks of the conflict's start, IEA member countries agreed to release 400 million barrels from emergency stocks, their largest such action. By May, those releases were supplying an additional 2.5 million barrels a day. Inventories, reserve releases and redirected trade helped absorb the initial shortfall, but the column cautions that these buffers are temporary.
US exports were part of that adjustment. The IEA reports that combined crude and petroleum product exports reached a record 13.1 million barrels a day in May, nearly a quarter above a year earlier, supported by higher production and withdrawals from industry and government inventories. Separately, the Sasakawa Peace Foundation's IINA reports that monthly US crude exports increased from 120 million barrels in February to 170 million in May. Asia's share rose from 28% to 47%, with shipments to the region increasing from 34.11 million to 83.64 million barrels.
A US-Iran agreement reached in mid-June sought to reopen the strait and establish a basis for lasting peace. The IEA reported early signs of rising exports after the agreement, while warning at the time that markets could enter a "red zone" in July and August unless the strait reopened fully.
How shale changed the balance of gains and losses
The research revisits a longstanding concern with nearly a decade of additional data. Hamilton's 1983 work documented a close association between oil price increases and US recessions. The 1970s oil crises, the Iran-Iraq War and the invasion of Kuwait reinforced that concern. Yet the disruptions surrounding the Arab Spring in 2011 and Russia's 2022 invasion of Ukraine were not followed by US recessions.
Meanwhile, horizontal drilling and hydraulic fracturing expanded US oil output. Crude production climbed from about 5 million barrels a day in the late 2000s to almost 14 million in 2025. In 2019, the combined balance for crude oil and petroleum products shifted from net imports to net exports. That does not mean the US stopped importing crude: it still buys substantial volumes abroad and remains exposed to global prices.
The trade shift changes where the income from higher oil prices goes. An importing economy pays more to foreign suppliers, whereas an exporting economy can retain more of the proceeds through domestic profits, wages, investment and tax revenue. The researchers examine whether those gains can outweigh the higher bills facing energy users.
Separating supply news from demand
An oil price increase driven by strong global demand need not have the same consequences as one caused by an expected supply shortage. To distinguish the latter, the authors build on Känzig's 2021 approach, examining oil futures movements around scheduled OPEC production announcements.
The method assumes that market prices already reflect economic conditions before an announcement. Provided no other relevant news arrives at the same time, the immediate futures-price movement can reveal an unexpected revision to anticipated oil supply.
The authors use those surprises to identify supply news shocks in a global oil-market model. They then estimate state-dependent local projections, allowing the US response to vary with net petroleum imports as a share of domestic petroleum consumption.
They report that the main results hold after accounting for several other changes in the economy: lower energy intensity, a larger services sector, shifts in manufacturing employment and periods of exceptionally low interest rates.
Benefits extend beyond oil producers
A simple change in trade accounting does not explain the estimated turnaround. Higher oil prices shift the US terms-of-trade response from deterioration to improvement, but the change in aggregate net exports is modest relative to the change in activity.
Nor are the estimated gains confined to extraction. Oil and gas employment responds more strongly than before the shale boom, but manufacturing, construction, trade and services also show more favorable employment responses. Total employment improves by similar amounts in oil-producing and non-oil-producing states. The findings therefore cannot be explained simply as gains in producing areas offsetting losses elsewhere.
The authors instead point to income and wealth effects that spread through the economy as more oil-related revenue stays at home. Real household consumption, which falls in the earlier setting, rises at the 2025 trade position. The improvement is particularly evident in spending outside food and energy.
Stock prices show a parallel change. The S&P 500's estimated response switches from negative to positive, peaking at about 2%. Airline and transportation stocks also respond more favorably despite their exposure to fuel costs.
Easier monetary policy does not account for the stronger activity, the researchers find. One-year interest rates respond somewhat more strongly as the US moves toward net exporter status, rather than indicating a more accommodative Federal Reserve.
Replaying the 2022 price surge
The researchers also construct a counterfactual for the oil price surge following Russia's invasion of Ukraine. They measure the gap between actual inflation-adjusted oil prices and a forecast made before the invasion, then identify the sequence of supply news shocks needed to reproduce that gap.
Applying the same shocks at two petroleum trade positions produces sharply different estimates. At the average pre-2010 position, US industrial production would fall by about 1%. At the 2021 position, the central estimate points instead to an expansion of more than 1% at longer horizons.
Consumer prices rise in both scenarios. At the 2021 position, the increase is initially smaller but lasts longer, while the one-year Treasury rate responds more strongly.
This is a modeling exercise, not a finding that supply news alone caused the 2022 price surge. The calculation assigns the entire departure from the pre-invasion forecast to supply news, although the authors acknowledge that other factors may have contributed.
Aggregate resilience does not remove individual costs
The authors argue that policymakers need to consider an economy's production and trade structure, not just the direct effects of energy prices on costs and purchasing power. In their account, income and wealth effects can materially change the overall response to a commodity shock even while inflation persists.
That aggregate result does not mean every household or business benefits. Drivers still pay more for fuel, energy-intensive industries face higher production costs, and net petroleum exports do not shield the US from global oil prices. The study finds a different balance of economy-wide gains and losses, not an end to the costs of an oil supply disruption.
