Thursday, March 05, 2009
The Energy Fallacy I
This is the four week running average of gasoline supplied to the US. The up/down zigzag in the graph is mostly due to the difference in consumption between the summer high and winter lows. Part of that is due to vacations, but part of that is due to construction and generally higher economic activity.
Aside from the seasonal effect, obviously average gasoline consumption of vehicles driven (fleet usage) will have an effect over time. The remarkable fall-off in consumption shown in this graph is due to less miles driven and fleet replacement. The fleet replacement effect is likely to be sticky; Hyundai-Kia and lower consumption models of vehicles keep raising their share, not just in the US but in Europe and other countries.
I have some doubt about fuel prices. Crude inventories continue high; crude prices are disconsonant. However, one beneficial effect is that the average spot price is staying in the magic range at which existing tar sand projects are profitable, and in fact in 2009 the average spot price and futures are at a level at which newer projects could be contemplated. That means that OPEC's ability to move prices is limited.
The chaining effect of any modern economy to energy prices is remarkable:
Anyone who remembers the 70s and early 80s knows a lot about what that spike in real gasoline prices does to the economy. But overall, real gasoline and diesel prices will stay higher, because more and more world supply is coming from more expensive production sources:
There's a phase shift in this graph. We are not going to get back to the average prices of the 80s and 90s. Instead, we are probably going to hold at about double the real price.
Needless to say, that will cut GDP growth significantly.
Diesel and gas (crude) are mostly used in the US for transportation and to grow food (both cultivating and in chemical inputs such as pesticides, herbicides and fertilizer). Very little electricity is currently generated from petroleum. But doubling the base energy cost of transportation passes along more than that increase in food pricing and and adds a hefty inflationary impact to other consumer commodities like clothing.
Since the consumer will be spending more of his or her income on just living (buying food, medicines and clothing), the consumer side of the economy is set for flatter growth.
Thus, it is quite extraordinary to read in Obama's budget plan that his administration expects GDP to grow by over 3% in 2010 and over 5% in 2011. It isn't going to happen. It wouldn't happen if there weren't a recession now. It wouldn't happen if we weren't running such a large deficit. It wouldn't happen if there was no baked-in energy drag on the economy, just because of the demographics.
But given the projected deficits and the huge government borrowing, plus the lingering effects of the recession, plus the demographic crunch, plus the baked-in energy problems, it would be raving insanity to predict over 2% growth in those years. In fact, we aren't even going to get to that, because of the energy plans of this administration. But that comes in the next post.
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