Oil, Automobiles, and the US Economy: How Much Have Things Really Changed?

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This paper studies the impact of oil shocks on the US economy—and on the motor vehicle industry in particular—and reexamines whether the relationship has changed over time. We find remarkable stability in the response of aggregate real variables to oil shocks once we account for the extra costs imposed on the economy in the 1970s by price controls and a complex system of entitlements that led to some rationing and shortages. To investigate further why the response of real variables to oil shocks has not declined over time, we focus on the motor vehicle industry, which is considered the most important channel through which oil shocks affect the economy. We find that, contrary to common perceptions, the share of motor vehicles in total US goods production has shown little decline over time. Moreover, within the motor vehicle industry, the effects of oil shocks on the mix of vehicles sold and on capacity utilization appear to have been proportional in recent decades to the effects observed in the 1970s.