Tuesday, April 6, 2010
There's a wealth of information in these charts. The main message is that when energy becomes expensive, the US economy reacts by figuring out ways to become more energy efficient.
The first chart focuses on recent price action. Today's price of $87/bbl. is about eight times higher than it was in early 1999, but it is almost one-half of what it was (briefly) in 2008. Talk about volatility!
The second chart puts prices into a long-term, inflation-adjusted context. In this view, today's price is a bit less than the prices that prevailed in the early 1980s price shock, and we pay a lot more in real terms for oil than we did at any time prior to 1974. Oil today is "expensive" from a long-term historical perspective.
The third chart shows US oil consumption. Notice how consumption declines following periods when oil prices in today's dollars exceed $50/bbl or so. Also note how oil consumption accelerated in the 1990s when real prices averaged about $25/bbl. Oil is expensive at today's prices, and that is likely to constrain demand.
The fourth chart shows oil consumption per unit of GDP, which has fallen almost 60% since the first spike in oil prices. That's a textbook case of how people find ways to use less of something when its price becomes expensive. Today the US economy uses about the same amount of oil as it did in the late 1970s, but the economy is 125% larger! As a result, the US economy is far less dependent on oil, all without firing a shot at our OPEC "oppressors." (And by the way, if we are dependent on OPEC for a large portion of our oil purchases, they are just as dependent on us for a large portion of their income—it's a two way street with advantages and disadvantages for both parties.)
The fifth chart shows how much the typical consumer's budget is spent on energy. Consider that despite the approximately seven-fold increase in the real price of oil from 1960 to today, consumers spend about 25% less of their income on energy.
What is the upshot of all this? I think oil prices are still relatively high, and that is likely to result in continued conservation efforts. I don't think prices are high enough to cause a serious problem for the economy, because energy costs are not consuming an unusually large share of consumers' budgets. But I'm guessing that if prices rose above $100/bbl (roughly equivalent to $3.50-4.00 for a gallon of gas) then we would see a significant slowing in growth as a result, and frustrated consumers.
This further suggests that in order for a cap and trade scheme or a carbon tax to yield significant declines in our consumption of hydrocarbon fuels, policies would have to be geared to push the price of oil to at least $100/bbl. Meanwhile, however, our economy has done a tremendous job of becoming more energy efficient thanks to the workings of our free market system coupled with the magic of price signals, and it is likely to continue to do so if left alone.
Posted by Scott Grannis at 2:24 PM