European Central Bank working paper finds oil shocks trigger larger cuts to European firms’ capital and R&D spending than in the United States

The European Central Bank published Working Paper No 3116, which does not represent the ECB’s views, analysing how global oil supply news shocks affect firm-level investment in Europe (including the UK) versus the United States. Using publicly listed firm data, the authors find that European firms significantly reduce capital expenditure and research and development spending after an oil shock, while US firms’ capital investment response is not statistically significant, pointing to greater European vulnerability to energy price volatility. The study uses a local projections approach on S&P Compustat data covering 1989–2023 and oil supply news shocks linked to OPEC+ announcements, where a unit shock corresponds to a 10% increase in oil prices. For Europe, the investment rate trough is around -0.526 percentage points one year after the shock, and R&D falls to around -1.96% two years after. The divergence is concentrated in financially constrained firms in energy-intensive sectors, while European firms with relatively greater market-based financing reduce investment by less than more bank-financed peers. The paper also reports suggestive evidence that the US shale revolution contributed to the cross-Atlantic difference in responses, and links the findings to policy priorities around energy supply security, price stability mechanisms, and deepening capital markets.