The macroeconomic impact of energy price shocks: Threshold effects and the fracking boom

This paper utilizes the Tsay test for a structural break in a vector autoregression incorporating real oil prices, oil production, interest rates and U.S. economic activity and finds that the system's parameters changed in 2012, which coincides with the large run-up in oil production in the U.S. due to the fracking boom. Since then, impulse response analysis indicates that the economy is better able to produce oil when oil prices rise, making high oil prices less detrimental to the real economy. When searching for threshold effects with regard to real oil prices pre and post 2012, we find that the lower threshold is relatively unchanged at roughly $50/barrel (in 2020 dollars), but the upper threshold has increased substantially, from approximately $68/barrel in the early sample to almost $96/barrel in the later sample. Interestingly, when employment in oil and gas extraction is added to the system, this study finds that while domestic oil production remains more sensitive to an increase in real oil prices since 2012, the same cannot be said for industry employment.