07 March 2012

Gasoline, Energy and the Economy

Continuing the ongoing discussion of gasoline prices and the economy, the figure above shows gasoline expenditures as a fraction of personal consumption expenditures for 1959 through 2011 (Data: BEA). You can see that gasoline ended 2011 at about the 4% level. Gasoline spending was actually higher in September 2011 (4.1%) than in December (3.8%).  The increase of 1% -- from 2.8% in May 2009 to 3.8% in December 2011 -- coincided with a 70% increase in the price of gasoline (data: BLS).

The graph below shows total energy spending (where energy is defined as the sum of expenditures on gasoline, heating oil, electricity and natural gas) from 1959 through 2011, and it shows that total energy spending is just under 6% of personal consumption expenditures. To some degree, higher priced gasoline has been offset by lower spending on heating oil and electricity.
The third graph, below, shows gasoline spending as a percent of total personal energy consumption expenditures. The graph shows a remarkable degree of consistency over many decades with gasoline comprising between 50% and 60% of total energy expenditures. Gasoline has increased above the 60% threshold as gasoline prices have increased and other energy expenditures have remained constant or declined.
So what does all of this data mean? Here is my interpretation:

1. The US economy is not yet in a danger zone with respect to gasoline prices -- $4 dollar per gallon gasoline is not what it used to be. What would it take for gasoline to exceed 5%, 6% or more of personal consumption expenditures? It is not easy to answer with any confidence, but if the increase in price of $1.50 per gallon or 70% from May, 2009 to September, 2011 resulted in an increase in personal gasoline consumption expenditures of 1%, then assuming linearity (caution: rarely a good assumption, but lets play around), then we'd have to see gasoline prices of more than $5 per gallon to reach that 5% threshold. There are good reasons to think that such an outcome is not imminent.

2. The overall impact of gasoline prices is somewhat muted in the context of total energy expenditures because of the falling price of natural gas. To the extent that natural gas can replace gasoline (not easy in the short term) this trend will be accelerated. Meantime, consumers will see a bit of an offsetting balance in their total energy expenditures due to lower electricity and gas prices. A hot summer could easily lead to increased expenditures as air conditioning is cranked up, and summer is traditionally when there is more demand for gasoline.

3. Why did things appear to change in US gasoline spending starting 2002? My guess is China, which joined the WTO in 2002 and subsequently saw its oil consumption increase by almost 90% from 2002 to 2010, a period of remarkable economic growth. Over the same time period the United States saw its oil consumption decline by more than 3% (Data: BP). Such trends are likely to continue, making it more important for the US to reduce the gasoline intensity of its economy and/or develop new resources. The pressure to drip and pipe will only increase.

4. In the context of such trends, it should be a matter of policy to seek to reduce the share of economic activity expended on gasoline in particular and energy in general. The good news is that there does seem to be a consensus, even in these most partisan of times, on what makes for a common sense energy policy -- The Economist makes a good start.

Here is President Obama just yesterday responding to a Fox News reporter who asked if he really -- deep down inside -- wants to see gasoline prices go higher. The President responds with his verison of the iron law:


H/T: Daniel Ahn and James Hamilton for useful analyses along similar lines.

9 comments:

SC Mike said...

Are there data on the effects of mass transit, tolls, and high-occupancy vehicle / high-occupancy toll (HOV/HOT) restrictions on overall fuel consumption? There’s an assumption that these initiatives reduce overall consumption by encouraging car-pooling and use of mass transit where available.

I’m sure they do, but wonder if the magnitude of the reduction, generally a local phenomenon, is readily available and provides information that’s usable / useful for policy-makers.

Drew Tyre said...

I like these long term trend analyses. Does anyone ever breakdown these percent expenditures on energy by position in the income distribution? It seems to me that an increase in energy prices might hit folks in the lower or 2nd quartiles of the income distribution much harder than folks like me, in the upper quartile.

Marlowe Johnson said...

Good post Roger. Have you considered what these trends look like for different income quintiles?

c1ue said...

The article listing 7 reasons why oil is a bubble fails to address several major points:

1) Mexico's production has been falling precipitously. This is a direct impact to the US as the US consumed the majority of this production.

2) Using the 2008 oil spike as a predictive example is a particularly poor one. 2005-2007 had average oil price under $58, 2009-2011 had an average oil price of over $68. The former period was during the peak of the housing bubble induced economic growth in the US, while clearly the latter, while a 'recovery' in some sense, is in no way a comparable growth period.

Even before Iran, oil prices were $80, and the Iran situation has not been resolved nor does it look to be any time soon.

I'd also note that using the US' gasoline consumption patterns during a recessionary and very weak recovery period as a pattern for consumption patterns during a growth period seems a poor fit. If the US' 8.4% unemployment rate matches up with a 3% fall in gasoline consumption, how much higher should unemployment rise or unemployment rates stay high in order to continue this trend?

Let's not forget the 1975-1985 era, while it saw significant improvements in US oil efficiency per $ GDP as well as overall oil consumption, was equally a very low real rate of growth era.

Mark B. said...

The first thing Obama said was "Do you think I'd say that during an election?" Not exactly "That's not what I believe." Let me know when Obama tells his progressive base "I will not raise the price of oil to fight climate change."

Harrywr2 said...

Meantime, consumers will see a bit of an offsetting balance in their total energy expenditures due to lower electricity and gas prices.

Trains run on diesel. Coal is delivered by train. Consumers will see a rising price in their electricity as the 'delivered' price of coal increases.

MIKE MCHENRY said...

Sec. Of Energy Chu is on record (2008 WSJ interview) as saying we need to find a way get US gasoline prices to the levels they are in Europe. That would have been about $8/gallon.

Abdul Abulbul Amir said...

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In the context of such trends, it should be a matter of policy to seek to reduce the share of economic activity expended on gasoline in particular and energy in general. The good news is that there does seem to be a consensus, even in these most partisan of times, on what makes for a common sense energy policy

What consensus? Obama seems wedded to replacing low cost fossil fuels with high cost alternatives. That is completely at odds with reducing the share of economic activity devoted to energy.

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Kip Hansen said...

Roger, what is the significance of the Pirate Flag one finds on your home page?

We live in the Caribbean--St Thomas, USVI--where such a display is considered either 'of commercial value' (meant to attract silly tourist dollars) or a sign of unfortunate age-without-maturity.

What does it mean in to you in Colorado?

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