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Since oil prices started rising in the early 1970s, the U.S. economy has responded by becoming increasingly more energy efficient. Our economy has grown over 160% since 1973, but our consumption of oil (first chart) has only risen a little over 12% during that same period. That translates into a 65% reduction in the amount of oil needed to produce a unit of GDP (second chart). These are remarkable statistics that are being neglected in the debate over our carbon emissions and our so-called dependence on foreign oil.
18 comments:
Scott,
I agree with everything you wrote except for the "so-called dependence on foreign oil" line. I believe our oil situation is a matter of national security and the Democrat policy against expanded drilling is going to cost us dearly once the economy heats back up again.
wow stop the car, send that to all of the environmentalists. You mean to tell me as a society we are cutting our dependence on oil? Alternative energy is the way of the future..
Scott ALERT!!!
Your friend and mentor, Art Laffer, is appearing on Glenn Beck (FoxNews Channel)as I write this (2:15PM PT)
Paul: We do rely on imports for a good deal of our oil, so it is fair to say we depend heavily on imported oil. But that is not necessarily a matter of grave national security. OPEC depends just as much on our money as we do on their oil. Indeed, the oil producers have plenty to worry about: What if we discovered a cheap oil substitute? What if we allowed offshore drilling once again? What if the dollar lost a signficant fraction of its value? Also important is the fact that oil is fungible, and one or two major OPEC producers might decide to stop selling us their oil, but if they want to stay in business and maintain their lifestyles, they will have to sell the oil to someone else, and that frees up other supplies for us to buy.
When bilateral trade is very important to both parties, neither has an incentive to rock the boat.
Nevertheless, it sure wouldn't hurt if we allowed more offshore exploration and production.
Scott,
The problem is there isn't enough production capability to avoid another runup of oil prices once the economy starts to climb out of the hole. High oil prices could strangle the recovery in its crib, don't you think? We should be tapping our domestic sources pronto. That would provide a real "stimulus."
"When bilateral trade is very important to both parties, neither has an incentive to rock the boat."
Agreed, but OPEC also uses those dollars to build nuclear weapons in Iran, and fund terrorists across the Middle East and Colombia. We obviously can't count on rational behavior from nutcases.
As Frank Gaffney says, we are funding both sides of the War On Terror...excuse me, "Overseas Contingency Operations" in Obamaspeak.
I would love the economy to ramp up to the degree that it pushed oil prices sharply higher. Wouldn't you? We can worry about how much higher prices can hurt the economy later. In my view, higher oil prices and higher Treasury yields will be welcome signs of economic strength, not a threat to the economy.
Also: since we use much less oil per unit of GDP, higher prices are not all that threatening to growth.
As for OPEC, I don't see any way in the world that we are going to significantly cut back on our OPEC oil purchases for at least the next 5 years. It's just not feasible to ramp up alternative production in that time frame, no matter what we do.
Scott,
All this is true, I am sure, but I am wondering about that "unit of output" and its significance. Didn't the GDP numbers become much more heavily impacted by financial services, retail sales, and other sectors where growth was a beneficiary of monetary inflation as much as higher economic "output"?
I don't know to what extent this is true, but I wonder if it didn't exaggerate both energy efficiency and overall "productivity" measures.
Scott,
"I would love the economy to ramp up to the degree that it pushed oil prices sharply higher. Wouldn't you?"
I know what you mean, but we had economic booms under Bush and Clinton with relatively low oil prices. We had excess oil capacity then, not so much now. Mexico's production, for example, is in rapid decline. They are also our 3rd largest oil supplier.
Oops, meant to say Reagan and Clinton..
Tom: You are trying to shoot holes in what is a rock-solid argument: the physical and economic size of the U.S. economy has grown substantially since 1973, while oil consumption has only increased 12%; therefore we have become significantly more efficient in our use of petroleum.
I have noticed, as oil prices ran up in late 2008, there was a corresponding drop in demand. However more recently as the prices went back down and then seemed to stabilize, there has not been the ramping up of demand/oil consumption that many expected.
Do you think there is something constraining sudden jumps in US oil demand? Or do you think this trend can be explained otherwise?
I think quick changes in oil demand are largely a function of changes in the strength of the economy. We saw a big demand slump near the end of the year that was reflected in just about everything. Otherwise, changes in demand are slow and evolutionary, and respond to technological and price changes.
Then, do you think that demand will gradually creep back up, to reflect the sudden drop in price?
I'm thinking that overall national consumption might stay lower than we would otherwise expect as freight movers and other oil intensive industries are slow to pick back up.
Also do you think the rhetoric about necessity for lower per capita oil consumption is actually having any effect on people’s buying habits?
Scott,
In the "Oil factoids" post, why did you select 1973 as the starting point and not 1970?
Thanks
The volatile oil prices are the symptom of an erratic dollar . Have a look at this chart it's fairly obvious:
http://www.forbes.com/static_html/oil/2004/oil.shtml
A stable dollar would have prevented the deflation of the late 90's and the reflation/ inflation of the 2000's that along with a host of bad gov policies helped to create this mess we are in now.
CDLIC: I chose 1973 because that was the year that oil prices started shooting up. The price of Arab Light doubled in 1973, rising from $2.48 to $5.04/gallon. Prior to that time oil had been so cheap that oil consumption was increasing rapidly. Higher prices in 1973 marked the beginnings of oil conservation efforts.
dave: I agree 100%.
martin: I do think oil demand will slowly creep back up, but first the economy needs to stabilize. I don't think people limit their oil consumption just because of political rhetoric. Prices are the biggest factor.
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