Oil’s Lesser Role? Its all Relative

All this Oil chatter has a small silver lining:  Energy remains a smaller portion of GDP, cost less per BTU, and is a smaller percentage of budgets than it was in the past.

The last time Oil caused a ruckus in the 1970’s, we were looking at a very different economic backdrop, with Oil as a much larger part of the economy:

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Source: NYT


All that said, oil remains problematic as a drag on the economy. See the Wal-Mart Oil comparo as an example.

Here’s an excerpt:

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Gas_3Not long ago, the notion that crude oil prices would ever reach $50 a barrel, much less surpass that, was a distant prospect. Some economists darkly predicted that sky-high oil prices would send the American economy into a recession, drive companies out of business and bring back both inflation and angry fuel lines.

Investors seem to have turned to this idea lately, reflecting a general uncertainty over the course of the economy. On Wednesday, they pushed stocks to their lowest point since October, in part because of worries that higher energy costs would crimp corporate earnings and stoke inflation.

But even as prices cling above $50 a barrel, those fears have proved to be exaggerated. So far, the economy has weathered the price increase with remarkable ease and there is reason to believe that high fuel costs do not have quite the impact they once did.

The reason is that oil has been knocked off center stage in the American economy. The decline in manufacturing and the rise in service-oriented jobs means oil is not as indispensable for economic growth. Manufacturers and electricity-generating plants, once among the biggest users of oil, now depend primarily on natural gas, coal and, to a lesser extent, nuclear power.

While the United States does consume more oil today, most of it is for transportation. And even as gasoline prices hover at record levels, the cost, adjusted for inflation, is still well below the peak reached in the early 1980’s. Even more important, fuel takes up a smaller share of Americans’ income.

I don’t neccessarily agree with this author’s
conclusion — its a bit too sanguine to say $50 oil is no big whoop:

This is not to say that the higher gasoline prices are not starting to pinch
– or that they will not send the economy for a loop if they go up sharply from
these levels. With retail prices expected to reach a nationwide average of
$2.35 a gallon this summer as travelers crowd the highways for vacations, the
high costs could become more of a burden.

Higher fuel prices have started to hurt slightly by curbing spending
elsewhere. Retail sales rose only 0.3 percent, to $339 billion, in March,
slower than February’s 0.5 percent gain and less than analysts expected. In
another tell-tale sign, consumer confidence declined for a second month in

Its also worth recognizing that the Hubbert’s Peak crowd has yet to be proven right. As is typically the case, the truth lay somewhere in between the extremes.


Oil’s Lesser Role in U.S. Economy Limits Damage From High Prices
NYT, April 23, 2005

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What's been said:

Discussions found on the web:
  1. fatbear commented on Apr 27

    er, Barry – I think you mean “more GDP per BTU” not “cost less per BTU” – but then, you may mean costing less in real dollars – up to you

  2. Jim Rapp commented on Apr 27

    The reason oil shock may be muted could be because consumers are simply going deeper into credit card debt and/or dipping into savings.

  3. david zaitzeff commented on Apr 27

    Hubbert was first proved right in 1970 or 72, when US oil production peaked in the lower 48, as predicted.

    now there is a range of years given for the world oil production peak, from 2005 to 2013, with a few outlying predictions of 2030 or 2037.

  4. Tom DC/VA commented on Apr 27

    Hubbert’s original theory of a production curve rested on the assumption that the oil production region was fully explored and would be exploited without interruption, which is why his prediction was right for the US but the prediction for a global peak has thus far been wrong. Still, it is very important to note that the global discovery rate peaked a long time ago, and none of the majors is making enough discoveries to cover their depletions. There may very well be a new Gahwar lying somewhere, undiscovered for political reasons, but it would be very foolish to base an economy on those hopes.

  5. spencer commented on Apr 28

    In the 1970s energy as a share of nominal personal consumption expenditures rose from 6% to 9%.

    From 1980 to 2000 it fell to 4%, and has since rebounded to just over 5%.

    Energy alone is probably not enough to cause a recession, but it can cause a significant slowdown.
    The problem then becomes what causes growth to rebound since neither fiscal policy or monetary policy can not be used to stimulate growth.

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