The Macroeconomic Effects of Oil Shocks in the Oil and Non-Oil Producing States

We examine the effect of structural shocks in the crude oil market on the US state-level economic activity in slack and non-slack periods, using linear and state-dependent models. We find that oil supply shocks produce a persistent and significant drop in employment, while the decline in personal income appears ten quarters after the shock. In contrast, economic activity shocks lead to a substantial and consistent increase in employment and personal income. Analyzing these responses across oil and non-oil producing states, we observe that non-oil states are more sensitive to the state of the economy, particularly in response to oil supply shocks. Further analysis shows that variations in the dynamic responses across states exhibit a regional pattern. To identify the factors contributing to these variations between states, we regress the responses on a set of state-level covariates. Our results show that industry composition and demographic factors, including educational attainment and income concentration, shape states’ sensitivity to oil shocks, underscoring the role of economic structure in mediating the effects of oil price fluctuations. JEL Classification: E32 Business Fluctuations; Cycles