How Oil Prices Affect the Debt

A report from the American Enterprise Institute focuses on the intersection of two issues that have concerned policymakers and the American public for decades: heavy U.S. dependence on oil and large federal budget deficits. Surging oil prices and trillion dollar federal deficits in recent years have magnified these concerns. While both topics have been independently studied, discussed and debated, little attention has been paid to the interactions between these two factors.

One analysis estimates how historic federal deficits and debt levels would have been different if oil prices had risen at the same rate as the price of other goods and services from 2002 to 2012, instead of increasing dramatically over this period.

– The results from this modeling exercise indicate that, by 2012, lower oil prices would have resulted in the U.S. federal deficit being $235 billion lower; the accumulated U.S. government debt being $1.2 trillion lower; and the debt-to-gross domestic product (GDP) ratio being 6.6 percentage points lower.

– Some of the drivers of the would-be impacts of lower oil prices are direct, such as the reduction in government expenditures on fuel.

– The more significant drivers, however, are indirect, and include reduced inflation, which reduces cost of living adjustments for Social Security payments and higher economic growth, which raises incomes and therefore income tax receipts.

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