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Page added on July 1, 2014
Oil Price Shocks Aren’t As Harmful As They Used To Be
Oil is a critical source of energy. In the past, a major oil price shock meant devastation for economic growth.
“Our obsession with oil prices comes with good reason,” writes Morgan Stanley economist Ellen Zentner. “Abrupt and sharp increases in oil prices have played a key role in precipitating recessions in 1973-75, 1980-81, 1990-91, 2001 and 2008-09.”
Recent turmoil in Iraq has sent oil prices much higher. But economists aren’t ready to freak out just yet.
“Over time, however, those shocks to the relative price of oil have spurred innovations that have led to a more efficient use of energy inputs,” continued Zentner. “Alongside growing use of other energy inputs, those innovations have reduced the world economy’s dependence on oil.”
Zentner presented this chart showing how a decreasing amount of energy has been needed to generated a dollar’s worth of GDP in the world.
Morgan Stanley
It may not be immediately intuitive how this could be.
Zentner offers a more micro level example that anyone who’s been in a car can appreciate.
US households have also adjusted consumption patterns over time. When gasoline prices rise, drivers tend to reduce mileage in response and/or seek out more fuel efficient vehicles. This altered behavior, coupled with shifting demographic factors and a slow labor market recovery since the financial crisis, has weighed on vehicle miles driven and lessens the aggregate impact of price increases at the pump. In the 12 months ended May 2014, average vehicle miles driven remained below the previous peak (reached in November 2007) for a 76th straight month. In 1990, consumers devoted 3.8% of total consumption to motor fuels. By 2013, that share had fallen to 2.3% (Exhibit 3).
Here’s her chart. It shares a similar downward slope as the chart above.
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Morgan Stanley
It’s certainly worth noting that innovation isn’t just about fuel efficiency. Technological developments have enabled U.S. oil drillers to extract fossil fuels from shale in North Dakota, Pennsylvania, Texas and elsewhere using unconventional methods. Indeed, thanks to the shale boom, we might not even see Middle East-triggered oil price spikes we’ve seen in past.
9 Comments on "Oil Price Shocks Aren’t As Harmful As They Used To Be"
forbin on Tue, 1st Jul 2014 6:23 am
Hmm, what are we saying here
price goes from $20 to $110 from what 2003 to 2013/4 , then a rise to $115 on Iraq is a shock ?
Seems even the fracking boom in the USA still could not bring it back to $20. Good though the input is , its obvious to me that , like Rockman says, this is the cost price function needed to extract that oil C+C .
the real shock would be a rise to a modest $150 ( not even double here folks ) .
Hey Rockman , got any ideas on how much more oil can be dug up for $150 or $200 ? ( open question to all actually )
I filled up last night on 130pence per litre , if the Americans can do that then you’re much more resiliant than you think……
Forbin
RIP Oil Drum
Davy on Tue, 1st Jul 2014 7:14 am
Another Wall Street financial “psychopather” pushing his agenda of greed, corruption, and market manipulation in the guise of financial investment advice. He fails to grasp the systematic realities of PO. As long as the price of oil stays in the goldilocks range currently there is a degree of stability. One can no longer compare oil price dynamics of a few years ago to today. The entire oil price dynamics relative to the new normal economics has changed. The current oil price stability is a temporary mirage if one digs deeper. This goldilocks range is narrowing quickly as PO dynamics compresses. We have production cost up, capex down, production results down relative to investment, and net energy down. Increases most recently in production has not come from high quality crude increases but mainly increasing NatGas substitutes and heavy crude low quality equivalents. Prices remain high and resist any pull downwards by the markets. It is said the markets are rigged and manipulated but it is apparent this is only to a point because oil prices have not shown any tendency at significant volatility on the downside. This high price relative to a healthy global economies energy needs is causing peak demand in developed countries allowing for growth in the primary growth driver China. China’s economic dynamics still are allowing oil consumption growth but even that is now facing limits of growth. It appears China is facing a growth decent which will confirm an aggregate global economic decent. Once this happens growth is finished and will never recover. It is only China that has the ability to lift world GDP at a level of significance relative to the systematic needs of the global economy. The global growth is a pseudo growth now with a debt bubble and central bank financial repression of normal market activity. This current “new normal” of “centrally planned global capitalism with central banks financial manipulation in every region will run its course. This may bring on a serious financial correction, contraction or financial collapse once that bubble deflates as bubble always do. In the meantime it is the steady pressures of PO dynamics that are also in effect. Part of these PO dynamics are much like the financial systems dynamics and that is the human component. All those above ground factors we know and talk about here affecting production. Yet, there is the bellow ground factors that are geologic and scientifically quantifiable and predictable. Predictable to the extent that above ground factors are related to human psychology and very difficult to model. The other profound point is net energy related to production costs and energy content that Short here describes so well. Also the industry insider Rock and his economic price pitch and that effect on economies and producers. This cat that wrote the article in question is shallow fishing news, stats, and economics. Fish deeper and one finds the truth. Fish deeper and on gets a glimpse of the abyss.
paulo1 on Tue, 1st Jul 2014 7:49 am
Judging by our reduction of driving with this modest and latest adjustment, I hate to think what a quick 30 or 40% rise would do? One geo-political burp in the ME would show us big time. A 1 month closing of the Straits of Hormuz would be a good first test. Riots would be worldwide…everywhere, including Frac Town USA.
Paulo
Pops on Tue, 1st Jul 2014 7:55 am
Americans can afford to drive less because we drive so much to begin with. But the other thing not often mentioned around here is natural gas. Overall energy spending is down not only because we’re driving less but because nat gas heats and lights lots of homes and businesses.
Kenz300 on Tue, 1st Jul 2014 9:41 am
Bicycle sales are up……….
People are walking more and taking mass transit more……..
Many new vehicles get 40 MPG compared to the 20 MPG vehicles they are replacing.
Electric, flex-fuel, biofuel, hybrid, CNG and LNG vehicles are becoming more common.
Time to diversify away from oil….. it is good to have OTHER options.
Davy on Tue, 1st Jul 2014 9:44 am
Pops I agree the US has a huge efficiency gradient to negotiate in the next few years just by forced changes in attitudes and lifestyles. Much low hanging fruit is yet to be picked. We must not forget though this spells disaster for the already stressed leisure and consumer economic sector. IOW financial pressures in a financial system already in extreme disequilibrium. The next debt meltdown is in the retail and commercial property sectors being maintained currently by extend and pretend polices. Yet, this will not matter because we have no choice but to reduce discretionary energy use. Increasingly energy will migrate to higher value economic activity out of necessity not choice.
MSN Fanboy on Tue, 1st Jul 2014 9:56 am
Hey Rockman , got any ideas on how much more oil can be dug up for $150 or $200 ? ( open question to all actually )
I want to know this too, preferably in years.
GregT on Tue, 1st Jul 2014 5:43 pm
“Hey Rockman , got any ideas on how much more oil can be dug up for $150 or $200 ?”
It matters little how much oil can be dug up at any price, if it can no longer run the economy. $100 a barrel oil is already doing irreparable damage. Almost 8 trillion worth in damage in 6 short years to only one of the world’s economies, and things aren’t going to get better as time goes on.
The future is no longer going to be as bright as the past.
Makati1 on Tue, 1st Jul 2014 11:21 pm
Philippine electric production:
“To date, the total installed capacity of the Philippines’ power generating plants is recorded at
~15,937 megawatts. Although coal
fired power plants reflect 26% of power generation followed by oil based at 23%, the renewable sources such as hydro, 21%, natural gas, 18%, and geothermal, 12%. The wind and solar based sources are evolving and in the future, could progress from its current share of 1%.
vs.
US: In 2013, energy sources and percent share of total electricity generation were:
Coal 39%
Natural Gas 27%
Nuclear 19%
Hydropower 7%
Other Renewable 6%
Biomass 1.48%
Geothermal 0.41%
Solar 0.23%
Wind 4.13%
Petroleum 1%
Other Gases < 1%
The Ps used about 1.5% of the electric the US used last year, 1/3 of which (~0.5%)was from renewable resources.