High oil prices become a US tailwind

22 Jun 2018

The US economy is likely to benefit from the latest upswing in crude oil prices, breaking its historic vulnerability to fuel price rises.

Higher gasoline prices have previously impeded US economic growth, reducing consumer spending and leading to increased imports.

But a boom in US shale oil production has significantly narrowed the country's reliance on imports and will further boost energy investment, production and exports, says Macquarie North America economist David Doyle.

“The conventional wisdom is that, as a net energy importer, the US suffers from higher oil prices," says Doyle. “Things are very different now because of the shale revolution. The US economy now has positive leverage to energy prices."

The US energy turnaround

US energy and mining investment has risen by an average $US13.4 billion a quarter since the start of 2017, according to the US Department of Commerce, a turnaround from the average quarterly investment drop of nearly $US17 billion over the previous two years.

This resulted in an energy and mining investment of more than $US460 billion in 2017, a 53 per cent jump on the previous year but 40 per cent below the peak in 2014.

The conventional wisdom is that, as a net energy importer, the US suffers from higher oil prices. Things are very different now because of the shale revolution. The US economy now has positive leverage to energy prices.

“Energy investment is not a large absolute number in itself, but a strong acceleration can have a substantial positive economic impact," says Doyle.

“There is an important multiplier effect as energy investment boosts transportation and warehousing activity and lifts employment."

Macquarie's energy team forecasts US oil production will exceed consensus expectations, adding around 1.5 million barrels of crude a day in 2018 and offsetting a 389,000-barrel decline in daily supply from OPEC nations.

The International Energy Agency (IEA) anticipates the US will undergo the largest sustained period of oil output growth by a single country in history between 2010 and 2025 and become a net exporter in the late 2020s.

“The US is now the world's swing oil producer," says Doyle.

Macquarie calculations show record US oil output is the closest it's ever been to meeting domestic demand.

While the country will remain reliant on foreign crude, IEA data shows the spread between imports and exports is at its narrowest point on record.

The new oil price equation

The US economy's new relationship to energy prices became apparent during a bear market in crude oil earlier this decade.

As New York oil prices fell from $US107 a barrel in mid-2014 to $US29 a barrel in the first quarter of 2016, US economic growth slowed from 2.7 per cent in 2014 to 1.2 per cent in 2016.

The US is now the world's swing oil producer.

The US economy accelerated to 2.6 per cent growth in 2017, together with a rebound in oil prices, now more than $US70 a barrel.

Doyle forecasts US GDP will expand by 2.7 per cent in 2018 and possibly more with gains in wages and employment, consumer spending and fiscal stimulus. The strong economic momentum should persist in 2019, he says.

Robust consumer profile

Consumers, having spearheaded the economic recovery over the past decade, have ample capacity to absorb higher gasoline prices, says Doyle.

Spending on gasoline and other energy goods remains well below the historical average, at 2.3 per cent of total disposable personal income. On top of that is the outlook for strong job creation and faster wage growth, Doyle adds.

“Fundamentals for the US consumer have rarely been more robust," he says.

For a copy of the report, US GDP Upside risks from energy investment, contact your Macquarie representative.

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