Posts tagged “economy”
As we have built more fuel efficient transportation vehicles over the years, we have been able to curtail our consumption of motor gasoline and distillates – diesel. However even with more fuel efficient vehicles, our gasoline consumption as measured by the U.S. Energy Information Administration (EIA) of total product supplied has been fairly stable since the 1980’s as more vehicles have come onto the road to offset greater fuel efficiency. Then in 2008, the Great Recession hit brought on by the financial crisis and the trend accelerated dramatically downward. By 2008 fuel consumption began to slide downward, by 2012 gasoline consumption literally fell off the cliff.
The primary catalyst for the dramatic decline in motor gasoline demand has been weak economic growth in the U.S. that has been exacerbated by stubbornly high retail fuel prices pegged to relatively high crude prices, despite a deepening global recession.
West Texas Intermediate crude oil, which had been selling for $105 a barrel at the end of March, fell to $80 a barrel last week, while Brent has come from $125 down to near $90. These price declines will translate into substantial savings for U.S. consumers in the weeks ahead.
Since Brent and WTI diverged, it has been Brent that matters for U.S. retail gasoline prices; this fact and the reasons for it were discussed here. A regression of the average U.S. retail gasoline price on the price of Brent over 2000-2012 captures the close relation (OLS standard errors in parentheses):
The figure below plots the price of crude oil in dollars per barrel and the price of natural gas on an equivalent BTU basis. Historically, the two prices had tended to stay fairly close together. But they began to diverge significantly in 2006. Even with the recent easing in oil prices, today you’d have to pay over $14 to get a million BTU in the form of crude oil, but only $2.30 if you were willing to use natural gas as an alternative.
It seems that no matter what financial series you look at, there’s a similar pattern of ups and downs over the last few years. I was curious to get a quick quantitative impression of how much of a contribution aggregate factors have been making to recent movements in the price of oil.
An ongoing discussion among some of us analysts at Consumer Energy Report has been about whether having natural resources like oil or coal is actually beneficial to a country (see Are Countries With Vast Oil Resources Blessed or Cursed?, Oil Dependence — Tom Friedman’s False Narrative, and Oil — Easy to Produce, But Not Easy to Buy).
The argument which I’ve made is that a boom in natural resources production can cover up some short-sighted economic policies; in effect, the earnings from producing oil mean that countries do not have to invest in their education or produce their own manufactured goods. The other side of the argument is that it can only be a good thing for new resources to be found.
Leaving aside the question of whether natural resource wealth undermines institutions or causes corruption (and there is good evidence of a resource curse among developing countries) there is one thing that increased production of oil does, once it gets to be a big enough sector of the economy: it pushes up the value of that country’s currency.
All else equal (as economists always have to say), new production of natural resources strengthens the domestic currency. That’s because those resources are either exported or are used to replace imports.
On Friday, the U.S. Bureau of Labor Statistics (BLS) released the February jobs report, showing an increase in employment by 227,000 – the third month in a row of job growth higher than 200,000. This report, coupled with strong numbers from the stock market and other leading indicators show that we may finally be entering a point of sustained economic recovery from the 2008 financial crisis. However, some people are speculating that the run-up in gasoline prices will push the recovery off track (see: LA Times, USA Today, Businessweek).
I think this run-up in gas prices is different than previous ones, because our economy is more balanced between oil producers, who benefit from high prices, and consumers, who are harmed. On balance, I agree with Professor Hamilton’s view over at Econbrowser: high gas prices won’t derail the U.S. economy.
Here’s why I believe that the current high price of oil is not enough to derail the U.S. economic recovery.
Although the prices of oil and gasoline have risen significantly from their values in October, they are still not back to the levels we saw last spring or in the summer of 2008. There is a good deal of statistical evidence (for example, ,) that an oil price increase that does no more than reverse an earlier decline has a much more limited effect on the economy than if the price of oil surges to a new all-time high.
As I wrote yesterday, I believe that the U.S. is moving fundamentally towards a point where it will be a major net exporter of energy, especially of refined oil products.
Everything we’re hearing now in the political sphere and in the press is about how bad the spike in gas prices is for the American economy. But – if we are to become a major energy producer – that cannot be true. It is no longer the case that high oil prices are unrelentingly bad for our economy: they’re only bad for oil consumers. Here in DC, we’re pounded by API’s ad campaign that three are over 9 million people directly employed by the oil and natural gas industry. In a total national workforce of 154 million, that means that almost 6% of the workforce is employed by the industry.
Certainly, we’ve seen the low unemployment rate in North Dakota as proof that an energy boom can create jobs. Last fall, the Wall Street Journal ran a very widely read article, “The Non-Green Jobs Boom” saying how clean energy was failing to produce jobs, but there were lots in traditional energy sources.
A Changing U.S. Energy Picture
This weekend, Thomas Friedman posed a question in his Sunday New York Times column: “Should the US join OPEC?” I generally don’t like to get into Friedman’s columns, as his name-dropping and taxicab reporting will drive you crazy. However, he probably has the widest readership of anyone in this field, and he does a good job of simplifying complicated issues.
Friedman says the “debate we’re again having over who is responsible for higher oil prices fundamentally misses huge changes that have taken place in America’s energy output, making us again a major oil and gas producer — and potential exporter — with an interest in reasonably high but stable oil prices.”
I hate to say it, but he’s right – although we’re nowhere near being a petroleum exporter today (a clear requirement for membership in the Organization of Petroleum Exporting Countries), I believe that fundamental changes in America’s supply and demand over the next 20-30 years mean that we’re moving towards a world where the U.S. has a real interest in exports – probably not of unrefined crude oil, but of all energy products.