This paper examines whether consumption smoothing, a central implication of the Life-Cycle/Permanent-Income Hypothesis (LCPIH), remains stable in the presence of large, modern oil-price disturbances. Using U.S. data and exploiting major oil-price episodes in 2008, 2020, and 2022, I find pronounced state dependence in household consumption adjustment. Durable expenditure responds substantially more strongly than nondurable consumption during severe oil-price disturbances. Correspondingly, the estimated excess-sensitivity coefficient rises significantly, indicating a weakening of households’ ability to smooth consumption.

To interpret these patterns structurally, I develop a heterogeneous-household dynamic stochastic general equilibrium (DSGE) model featuring Ricardian and liquidity-constrained households, household energy expenditures, productive oil, and endogenous labor supply. The calibrated model reproduces the direction and relative ordering of the principal durable and aggregate consumption responses. This shows that limited access to intertemporal smoothing amplifies household welfare losses, while the nondurable response exhibits only partial consistency with the reduced-form estimate.

I then use the energy-environmental extension of the Global Trade Analysis Project (GTAP-E) model to quantify economy-wide adjustments in international trade, production, sectoral allocation, emissions, and welfare. Counterfactual simulations evaluate alternative petroleum-tax relief policies and reveal a policy trade-off: tax relief can mitigate welfare losses from large oil disturbances, but its benefits must be weighed against changes in production, external adjustment, and emissions. The results show that the degree of consumption smoothing is state-dependent and reflects interactions among large oil-price disturbances, household heterogeneity, production adjustment, and international trade.