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Shift in Supply a Major Factor Behind Oil Price Decline, Says Dallas Fed

Plunging oil prices boost U.S. economy, hurt oil-producing states, according to Dallas Fed’s Economic Letter

For immediate release: April 9, 2015

DALLAS—A major factor behind the recent oil price decline is a shift in supply, according to the Federal Reserve Bank of Dallas’ latest Economic Letter.

In “Plunging Oil Prices: A Boost for the U.S. Economy, a Jolt for Texas,” Anthony Murphy, Michael Plante and Mine Yücel write that world oil production grew at a significantly faster pace than demand in 2014.

Surprises to the upside include the Organization of the Petroleum Exporting Countries’ decision to maintain production levels in the second half of 2014.

The drop in oil prices is a boost to the U.S. economy because households have more disposable income, according to the authors, who note that costs and benefits of the recent oil price decline are unevenly distributed across the 50 states.

As a result, employment will be negatively impacted in eight states—including Texas—that hold the highest concentration of energy-related employment, typically in oil and gas operations.

Aside from the adverse employment outlook in these states, the eventual impact of lower oil prices will depend upon how long they last, according to Murphy, Plante and Yücel. Prices are forecast to rise gradually, though not back to $100 per barrel anytime soon.

“Oil prices have declined substantially amid burgeoning supplies and weaker-than-expected demand,” the authors write. “The oil market will adjust to this new environment. Lower prices will eventually spur more demand.”

Murphy is an economic policy advisor and senior economist, Plante is a senior research economist and Yücel is senior vice president and director of research in the Research Department at the Federal Reserve Bank of Dallas.

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Media contact:
Justin Jones
Federal Reserve Bank of Dallas
Phone: 214-922-5449
Email: Justin.Jones@dal.frb.org