Wednesday, February 15, 2012

$4 gasoline isn't a big threat to the economy




As the top two charts show, oil and gasoline prices are very close to all-time highs. Arab Light crude is closing in on $120/bbl, driven by increasing mideast tensions, and that's only $26 off its all-time high of mid-2008. As the bottom chart shows, the nationwide average price of regular gasoline is now over $3.50/gallon, and it could be headed once again to its all-time high of $4.00. (Here in So. California, we're already paying over $4/gallon at most stations, and I've seen prices as high as $4.50.) Gasoline prices at the pump are just following the pattern of crude oil and wholesale gasoline prices.

Do rising oil and gasoline prices pose a threat to the economy? I know it's painful for many folks to have to shell out upwards of $100 to fill up the tank, but I doubt this will bring the economy to its knees.


This next chart is one reason why $4 gasoline is not a big threat. Thanks to conservation and technology, the U.S. economy today requires less than half as much oil to generate a unit of output than it did in the 1970s.


Despite the fact that the U.S. economy has more than doubled in size since 1979, our oil consumption has hardly risen at all. Cars are much more efficient these days, and more and more of our economy gets transacted through the internet, where marginal costs are almost nil.


As this chart shows, the average consumer today spends only about 6% of his income on energy (most of which comes from petroleum products), and that is almost 30% less than what he spent at the end of 1983, when the economy had just finished its first of what would prove to be seven years of very rapid growth and oil was very close to its (then) all-time highs. Simply put, we use a lot less energy today to power our economy, so the fact that energy is relatively expensive is much less important. (Actually, it's because energy is so expensive that we use a lot less of it.)


Meanwhile, plunging natural gas prices (thanks to new drilling technologies) help take the sting out of rising crude oil prices.

So, even though gasoline pump prices are making headlines and causing much irritation among consumers, there is little reason to think that this puts the economy at risk.

18 comments:

Benjamin said...

Excellent insights by Scott Grannis--in fact, he understates the case. Oil consumption is actually now falling in the USA.

Oil consumption has been falling for more than 25 years in Europe and Japan where they tax crude oil consumption. Now that prices are higher, we are fallowing the same path.

Thanks to private-sector responses to higher prices, we can use less and less even as we live better.

Obama and the GOP (remember ethanol) would do well to let the price signal work, and eschew government efforts to make things better.

Taxing gasoline and eliminating corporate income or payroll taxes is an idea I like.

Unknown said...

Speaking of gasoline, for the foreseeable future, the Midwest is going to be the Place to Be if you want cheap gas.

Midwest oil oversupply due to rapidly growing production
"U.S. Midwest crude oil supply growth of nearly 100% or 808,000 barrels per day (b/d), combined with inadequate demand growth, will result in oversupply, transportation constraints and deeply depressed prices in the region."

Benjamin said...

Unknown:

Cushing is often overloaded with oil.

Ironically, we have oil gluts in the USA, while gasoline demand is dropping steeply.

If Iran-Libya can be ironed out, and if Iraq does anything, we may see global glut again, like in 2009. Tankers in Malta, full of oil, nowhere to offload.

The current price for oil is set on the NYMEX, in a manner dubious at best. At this price, any oil anywhere is worth extracting. And demand is very very soft.

Donny Baseball said...

I don't dispute this as a macro theme, but on a micro level, and at the margin, this hurts. For every month that we have $4 gas rather than $3.50 gas is roughly $6 billion of consumer DI lost. It won't cripple us, but losing $60 billion+ between now and the end of the year isn't nothing.

Scott Grannis said...

Donny: you are falling into the mercantilist trap. Spending money to import oil does not necessarily harm our economy, and buying domestic oil doesn't either. Every dollar we remit to OPEC for oil must ultimately be spent in the U.S. economy on something--it does not go down a black hole. The main impact of expensive energy is to slow growth, since it makes economic activity more expensive on the margin. But with energy expenditures representing such a small part of GDP, this isn't a real serious problem for now.

Dr William J McKibbin said...

Even $8 per gallon gasoline is not a threat to the US economy -- I already pay around $8 whenever I'm living in Europe -- my travels back and forth between Europe and the US have always made me wonder why Americans are so convinced that $4 plus gasoline is the end of the world -- trust me, it's not -- by the way, the big losers with higher fuel prices is not consumers, but the US military...

Hans said...

Do not believe the stats coming from the BEA...They are as bad as their labeling of their charts...

I will keep it simple, any savings in energy efficiency has been destroyed by the HIGH cost of gasoline, which has increased at double the rate of inflation...

http://www.neo.ne.gov/statshtml/195.htm

http://www.energyfuturemontana.org/2011/presentations/MTEnergyConference2011A.pdf

sgt.red.blue.red said...

It may take more than 4 dollars or gallon, or higher than the 145 per bbl that oil got to in the last go-around, but Alan Reynolds had this to say about the most recent recession and high oil prices....

It Didn't Begin Here

Donny Baseball said...

Scott,
I didn't have national borders in mind, I see a family that is spending $100 more per month on gas to go the same places - work, school, shopping, etc. - having $100 less to spend on other things.

I do not wish to make a mercantilist mistake, but I track the energy business pretty close, and dollars from developed countries are flowing to energy infrastructure projects in developing countries. So our gas dollars are flowing into capital in the form of giant drilling rigs for Brazil, export facilities in places like Angola, LNG terminals in Australia, massive new refineries in the Middle East and China. I understand that all this money moves around and eventually comes home, but near term my gas dollars seem to be building out capital infrastructure places that want to be leaders in the energy business of tomorrow - and that stays in situ. Long term it is all a wash, but short term domestic DI is being converted into foreign capital assets, which limits near term economic activity. I would feel differently if those energy dollars were being converted to capital assets close to home, like for instance a pipeline from Canada to Texas...

Scott Grannis said...

Donny: don't think for a moment that I don't agree with you on the Keystone pipeline. Not allowing the free market to develop our own energy resources and infrastructure is far worse than having to pay money to OPEC for oil.

Scott Grannis said...

Unknown: I have the greatest respect for Alan Reynolds, but I don't agree with him on this one.

Scott Grannis said...

oops, my last comment was directed to the sgt.

Unknown said...

From sgt's link:

"In 1983, economist James Hamilton of the University of California at San Diego showed that "all but one of the US recessions since World War Two have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum." The years 1946 to 2007 saw 10 dramatic spikes in the price of oil -- each of which was soon followed by recession."

It's already been a year since the Arab Spring uprising sent oil prices to nearly $120 dollars. In the other examples sgt's article mentioned, the recessions started a few months months after - or even simultaneous to - the onset of recession.

The exception stg's article mentioned was the 1960 recession. Alas, there is another exception ...

Stuart Staniford here did an analysis last year which concluded that the oil price spike from the Iraq invation of Kuwait did *not* cause the 1990 recession, because the recession had already begun before the invasion began. So that kills that example. Now we have *two* exceptions, and possibly a third if the US does not drop into recession any time soon. With two historical, and one potential current example, at that point one starts to wonder about the validity of the theory.

BTW, the article I linked in my reply above should start telling people that the US is not far from being able to *benefit* from high oil prices.

Unknown said...

And to emphasize my point above, the NBER date of the 1990 recession began in July 1990. The Iraq invasion of Kuwait and the resulting oil price spike did not occur until the next month.

Frozen in the North said...

Actually, Scott something is afoot in the gasoline world. Consumption is dropping very very fast, and gasoline is a just in time product -- didn't know this but it doesn't keep.

So to say that $4 gas doesn't matter seems to mis the reality out there. Consomption is falling fast, very very fast

Hans said...

It is a known fact that when goo prices double, a recession is in the offering...

Regarding Frozen's comments please note the following:

http://globaleconomicanalysis.blogspot.com/2012/02/petroleum-3-month-rolling-average-turns.html

Those that dismiss rising gasoline prices, do so at their own peril..

Hans said...

Ben Jamin, there is no proof that consumption in EuroLand is declining...

http://www.indexmundi.com/energy.aspx?region=eu&product=oil&graph=consumption

http://www.economist.com/blogs/dailychart/2011/06/oil-production-and-consumption

sgt.red.blue.red said...

Unknown, Yep, I hope you're correct about the U.S. improving it's own production picture.

I agree we use energy more 'efficiently' than we used do, here at home. And our demand is rising very slowly.

Worldwide demand growth is another picture, however.

The 120 dollar number hit last 2nd quarter was well below the (real) threshold hit at 145 a few years back. Last year's GDP growth sure turned out to be less than was forecast for last year.

Like my Dad used to say, 'we'll see'.