Connections between oil production, oil dependency, and economic growth
In every introductory macroeconomics course, oil is used as the classic example of a negative price shock. Professors tend to discuss the 1973 oil price shock triggered by the Arab-Israeli conflict and the 1979 oil price shock caused by the Iranian Revolution as reasons for rising inflation and falling global output—connecting these shocks to models about investment and aggregate supply and demand. More recent literature, including this presentation by St. Louis Fed President James Bullard, indicates that oil prices can sometimes be interpreted as a proxy for demand. But what’s the impact of oil supply for the consumers in oil-producing countries? We can use FRED to plot crude oil production versus GDP growth in oil-producing countries to get at least a first idea of just how oil-dependent a country might be.
For the United States, the relative importance of oil to industrial production (which is now less than 20% of the economy) is typically between 7% and 15%. Thus, in the graph above, the correlation between oil production and GDP growth per capita is practically negligible. In fact, the correlation is slightly negative. It’s unlikely that changes in oil production have much of an effect on aggregate economic activity.
But the relationship between oil production and GDP growth per capita is much stronger for countries that have more oil-dependent economies. For example, the correlation coefficient for this measure is 0.51 for the United Arab Emirates, 0.76 for Iran, and 0.93 for Iraq. (The closer this coefficient is to 1.0, the stronger the positive correlation.) The scatter plot below indicates the strength of this positive relationship. For these countries, aggregate well-being could be largely influenced by how much oil the country produces—which is why economic diversification is key to building a national economy less susceptible to oil or other shocks.
How these graphs were created: For the first graph, search for and select “constant GDP per capital United States” and click “Add to Graph.” From the “Edit Graph” panel, use the “Add a Line” feature to search for and select “industrial production crude oil”; change the units to “percent change from year ago” in the “Units” dropdown menu and click “Copy to All.” In the “Format” tab, change the line type to “Scatter Plot.” For the second graph, search for and select “constant GDP per capita United Arab Emirates” and click “Add to Graph.” From the “Edit Graph” panel, use the “Add a Line” feature to search for and select “crude oil production United Arab Emirates.” Repeat this process for each individual country. Change the units to “percent change from year ago” in the “Units” dropdown menu and click “Copy to All.” Change the line graph to a scatter plot by using the “Format” tab and changing “Graph type” entry to “Scatter” and pick different colors as needed.
Suggested by Darren Chang and Christian Zimmermann.
View on FRED, series used in this post: