Oil prices and U.S. GDP both fell in 2009. Use a graph to explain this observation of falling oil price and falling GDP.
In 2009, world economy encountered one of the most severe downturns due to financial crisis incurred in 2008. The crisis resulted in a period of deflation (refer to Exhibit 1) and failing consuming confidence, which cause a fall in aggregate demand. Decreasing demand shifted the AD curve to left, from AD0 to AD1 (refer to Exhibit 2) so that GDP decreased to Y1.
We assume all other products price does not change in short run, except oil price. As in equilibrium point B, potential oil supply was greater than current demand, there is pressure to lower oil price to the long-term equilibrium point ...view middle of the document...
5 billion in unemployment and other benefits and $62.6 billion in job creation grants. This stimulus package shifted AD1 to AD2.
Meanwhile, under pressure of decreasing oil price and demand, OPEC deducted oil supply in 2009 in order to maintain oil price. SRAS0 should have been shifting downwards to SRAS1 if no supply deduction, but in result, SRAS0 shifted to SRAS2. Thus, in short run, the equilibrium point move from B to D with lower oil price (P2) and lower GDP (Y2). In long run, equilibrium point would move to E with same GDP but lower oil price if no further stimulation of demand or supply shock.
Price level, P
Income, output, Y
Source: OPEC Annual Statistical Bulletin Y2009
Exhibit 4 shows from 2008 to 2009, US real GDP dropped in 2008 and increased since early 2009. The Congressional Budget Office projected the stimulation package would increase GDP growth by 1.4% to 3.8% by the end of 2009. In March 2009, before the plan was launched, Q1 GDP was -5.4% on March 5, 2009. By Q4 2009, GDP was up 3.9%. The real situation proves our conclusion above.
There is another concern in thinking of this question. The economy today is more service-based and less manufacturing-based. Generally speaking, service requires less energy to produce. Also considering conservation efforts and technological advancement, US economy is less affected by oil price in recent years compared with in 1970s.
Exhibit 5 shows the decreasing trend of oil consumption per unit of real GDP in the recent fifteen years.
Source: OPEC Annual Statistical Bulletin, U.S. Department of Commerce: Bureau of Economic Analysis