Tuesday, April 12, 2011

OMG!  Fuel prices are rising!...


Aaron and I have been blown away by the remarkable efficiency of our CIH MX305. And our (relatively) new tandem, a 2003 IH 7400. [Look - it was a 20-year jump from the previous truck].

So much so that fuel prices can pretty much do what they want from our perspective. It's about energy intensity.

First, it's clear that energy intensity is decreasing. Figure 1 depicts log quads of primary energy consumption versus log real GDP. Holding all else, one might think that reduced energy intensity would result in lower sensitivity to energy price shocks. Unfortunately, as Jim Hamilton points, out, there's no clear relationship between intensity and output sensitivity to energy shocks (on a sectoral basis).


That's why a rise in oil prices doesn't mean quite what it used to.

Still, it’s not time to panic. This spike in prices, while annoying, is smaller and less likely to last than previous spikes. More important, the American economy is better prepared to deal with it. The oil shock of 2008 pushed Americans to buy fewer S.U.V.s and trucks, and more fuel-efficient vehicles, and the cash-for-clunkers program took hundreds of thousands of gas guzzlers off the road. On top of this, the downsizing of American car companies leaves them less exposed to drops in demand than they once were. Previously, falling sales of S.U.V.s and trucks forced American automakers to lay off tens of thousands of workers, further punishing the economy. Now G.M. and Ford are already employing fewer people and making fewer big vehicles, so any drop-off in demand will be less damaging.What’s more, not all gas-price increases put a significant dent in growth; between 2002 and 2006, for instance, oil prices rose a hundred and fifty per cent, yet the economy continued to grow briskly. And not all price spikes are created equal; much research suggests, instead, that consumers become somewhat inured to higher oil prices, and really tighten their belts only when prices hit new multi-year highs. Given that we remember, all too well, paying more than four dollars a gallon in 2008, the recent price jump may be less disastrous. Hamilton has argued that only if prices get to be around a hundred and thirty dollars a barrel (they hit a hundred and ten last week) will we experience an oil shock like those in the past. [More]

The moral here is while fuel prices ripple through our inputs and shave our received prices, they can't hurt us as much as before if we have been adjusting like most Americans: buying hybrids, driving less, etc.

Update: Other people seem to see this differently.

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