Wednesday, October 21, 2009

Higher oil prices are not a threat to the economy







Crude oil is in the spotlight these days, as its price climbs above $80/bbl. The trigger for higher prices appears to have been the news that gasoline inventories were much lower than expected. Surprise! Lower prices earlier this year combined with a rebounding economy added up to increased demand for gasoline. Is this a cause for concern? Hardly. Recoveries do not bring with them the immediate seeds of their own destruction. Prices are up because demand is up. The economy is stronger. If there is any cause for concern, it is that this is one more of many examples of why monetary policy is too easy these days, and why the Fed should be tightening.

These charts help put things in perspective. To begin with, in real terms oil is no more expensive today that it was in the early 1980s. It's actually much less expensive, when you consider that consumers spend about half as much of their disposable income on oil today as they did back then. The reason for that is conservation: our economy has become far more energy efficient. We use about half as much oil per unit of output today as we did back then. U.S. oil consumption today is about 19 mbd, which is the same as it was in 1980, and that's a rather remarkable fact since the economy has grown about 120% since then.

4 comments:

Public Library said...

This is your favorite calling card. Yet many believe higher oil prices pushed economies into recession before the current financial crisis.

I am not convinced it did not. History is pretty kind to the high oil/recession correlation.

j said...

Interesting charts but I think that high gas prices are seen by the consumer as a high impact consumption tax. Over the last several years it seems that consumer confidence and consumption take a hit when gas prices spike. With the consumer still in a fragile state I think higher energy costs are a net negative.

Scott Grannis said...

J; I think gasoline prices need to climb above $4 before they start having a serious impact on people's behavior. We're not there yet.

DouglasR said...

Scott, could you correlate recessions to the graph of oil prices and present the chart? I have seen charts where there is a direct correlation of recessions immediately after spikes in oil price. The correlation seems pretty clear, and logical when it comes to it.

I last raised my prices for chimney cleaning when gas went above $3/gal. For the last 3 years I have kept my prices steady... everybody is feeling the pinch, yes? If gas gets above $3.50/gal I will have problem. When it costs me over $100 to fill the tank on my van I have to begin passing some of that to my customers.

Chimney sweeping may be more or less recession-proof, but I have to be sensitive to where my customers are at and when heating oil threatens to go over $4 and gas is over $3.50 people here in New England begin freaking out. Let the wood-burning begin...