Rising world oil demand and the U.S. economy

This morning, the Joint Economic Committee of the U.S. Congress took up the implications of rising world oil demand for the U.S. economy. I was invited to participate along with Daniel Yergin, Co-Founder and Chairman of Cambridge Energy Research Associates.

I have some more discussion at the Washington Post as well as the following links:

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20 thoughts on “Rising world oil demand and the U.S. economy

  1. Steve Kopits

    Nice piece.
    Here’s the quote of the week, from Commodities Research at Macquarie, a leading natural resources investment bank (April 15):
    “When looking out into 2011-12 and beyond, we see global spare capacity reduced to zero by 2013. Prices will again need to rise to accelerate upstream spending. We do not think, however, that production can be ratcheted higher fast enough. Oil prices could then rally to reflect scarcity, just like they did in 2Q of last year. The bigger risk to our forecast for the long term is to the upside.”
    Would you interpret this forecast as a warning about recession in 2013-2014? If so, then what is your energy policy?
    You can read some on this from me here:
    http://www.dw-1.com/news/info.php?refnum=430

  2. spencer

    My position on oil is very much like Yergins, and not out of line with yours.
    So why shouldn’t we be more worried that over $60 oil seems very hard to explain and clearly threatens the fragile rebound in consumer spending?

  3. GK

    The biggest boost in oil prices will come from currency appreciation in India and China (inevitable as their prosperity rises). So oil will suffer from a double hit of Ind/Chin domestic demand growth, plus currency appreciation.
    That is all a one-time hit. But it will be painful for a few years (until innovations in efficiency, batteries, alternatives, etc. all catch up).

  4. Zero X Owner

    GK,
    I also look at changing currency exchange rates as one of several back of the napkin factors in changes to resource prices in any particular currency.
    My current two year old production performance electric vehicle experience reports that the personal pain of the transition felt like a huge weight lifting off my shoulders and a big smile growing on my face.
    The catch up on the items you mention is more than well begun, indeed mostly already here for good enough, and new (and not so new) products that work great based on that are coming out monthly – consumers just need to learn about what’s available now and coming out near term and start putting down deposits towards (or buying outright on the spot) their fresh new electric hotness (in some cases quite inexpensive). We can grow the luxury infrastructure conveniences as we go.

  5. Mattyoung

    Steve,
    Linked to your report, read it, I think it absolutely correct.
    I point to my barely visible change, in the beginning of 2008, in real oil prices. This was glitch in the run up of prices, not seen in any previous run up. After the glitch prices kept going up.
    My theory was that at the glitch, consumers changed their usage model of oil, but some more efficient user of commercial transport kept on using. The consumer passed on its own use of oil, up the transport chain to this commercial substitute which gained some economies of scale.
    Some commercial delivery system used new technology, in combination with the consumer, to replace the consumers historical method of local goods transport. UPS and Internet style shopping tested out the new system, and found it partially worked.

  6. aaron

    Matt and Steve, definitely some truth to it, and that’s exactly what JDH has said. We’ve had a slight decline in production.
    But it’s also very important that during that same time our consumption was becoming less efficient.
    I think the main factors are bad information in the public (fast acceleration is NOT significantly less efficient than slow acceleration and it improves throughput at intersections and coming out of other bottlenecks, and higher cruising speed are more efficient up to 55mph), an aging poplulation that has slowed down, cell phone use, and mis-management of traffic lights and speeds.
    For commercial, their efficiency was flat or slightly improving. I believe this is because commercial traffic already had to operate in the ways that made car traffic less efficient. Trucks simply couldn’t get up to speed quickly and consequently hit more traffic lights and also moved at lower top and average speeds. Commercial traffic seems have benefit from tech improvments, lower top speeds on freeways (governers we set at lower top speeds by many shipping companies), and less interference from car traffic. Most of this happened in the beginning of ’08.
    I think even more important is that the increased fuel consuption per mile is indicative of a slowing of traffic and more time wasted. Even at $3.60 a gallon, time was more valuable than the gasoline consumed at 65mph (GDP per capita per hour was $4.97 using 2007 GDP and pop from CIA world fact book).
    A look at VMT (road only) per Diesel consumption and a link to INRIX report on trends in travel times.
    and
    VMT per gasoline consumed.

  7. DickF

    As of this moment the traditional gold/oil price relationship has been restored with gold at $939/oz and oil at $62/bbl, 15:1. Last year the relationship was around 8:1 while earlier this year after the oil correction it was around 20:1. If the price of oil continues to climb there is a good chance that the economy will once again begin to decline and the stock market fall. Indicators of a weakened economy have run counter to the direction of the market for the past weeks. A negative shock (how I hate that phrase in economics) of high oil prices could be the catalyst that turns the market negative. Use caution.

  8. Bruce Hall

    Every ten years we have a few years of oil left. Every ten years the U.S. government refuses to open known oil-bearing land for development.
    Every ten years we seem to have a major economic downturn related to oil.
    Hmmmmmmmmm.

  9. JS

    Professor,
    Last night I took the time to sit down and thoroughly work through your paper. As an Oil noob it took a great deal of time but I found it very instructive. I just completed my first year of grad-school (econ) and this might be the first issue specific paper I’ve had a personal desire to read and understand. I came away with several questions one of which you might be able to help with. On page 23, I think, the DSGE model. I couldn’t firmly conclude what you were taking the FOCs w.r.t.?
    Thanks much,
    Joseph

  10. thruth

    Prof Hamilton,
    I made several comments on your testimony on Scott Sumner’s Money Illusion blog. Scott and I have had a back and forth on oil prices as a cause of the recession. His comments have shaped my thinking, but these views are my own:
    I find it hard to believe that commodity run up in the Summer of 07 had nothing to do with the financial crisis that started around the same time. Over the course of Jul 07-Jul 08, the Fed cut interest rates by about 4% and a number of other measures were put in place to prop up global AD. The global financial sector was hemorrhaging cash over that time, so surely commodity based sectors were simply being pushed to meet the stimulated AD, resulting in inevitable demand driven stress on commodities prices. In my view, the post Jun 07 run up reflects both elevated consumption in that year as well as expectations of increased reliance on commodity based industries going forward. That can be interpreted as a fundamentals based reallocation of capital (I don’t know whether that’s different from what others have been describing as “flight to quality” or “speculation”). I have no position on whether there were rising oil inventories that the econ blogosphere seems to think is needed for a speculative price run-up, as I don’t think it matters.
    Commodity prices ultimately gave up the earlier gains when AD collapsed around October last year in the wake of the Lehman failure and run on the banking system. Clearly commodities aren’t immune from deflation. Will we see price spikes again? I’m sure we will. Can oil price shocks cause recession? No doubt. Can other factors drive oil price shocks? In my view, unquestionably yes.

  11. JDH

    JS: Use equation (1) to substitute out Z(t) from the objective function and then take derivatives with respect to X(t) and I(t+1).

  12. aaron

    I doubt it will happen, but I’m hoping people stay home this weekend and gasoline suppliers see it as a reason not to buy at high oil prices.
    I’m hoping that the long winter and early memorial day, uncertain futures, and high prices, people will be more likely stay home and catch up on yard and housework this holiday weekend.

  13. Tom

    rising world oil demand? what rising world oil demand? what planet are you living on?
    okay, actually i’m glad that we’re confronting this issue early. the sooner we wean ourselves off oil, the better. personally my leanings are quite hard-core conservationist. sorry, fellow humans, you do not belong to an endangered species.
    but in 2009 oil demand is on the downswing. the saudis are limiting production from traditional fields and delaying the introduction of their next fields. the russians aren’t even thinking about tapping their next fields. all that jabber before july 2008 that we’d be running out of oil soon was just plain wrong. the chinese were running up prices on themselves. and now they and, apparently, us banks with excess fed-created money, are doing it again.

  14. don

    JDH: I disagree with your characterization of the importance of oil prices in causing the current recession, and I have some minor nits to pick with your statement as well. For example, the oil price increase may have reduced the value of housing with remote commutes, but it should also have increased RE prices closer to town.
    To me, the overriding cause of recession was consumer debt loads and the deflation of artificial wealth valuations that supported consumption. Basically, the same set of circumstances that led to GD1. Oil prices didn’t help, but by themselves, I simply can’t see how they could have resulted in a downturn anything like the one we have seen.

  15. aaron

    Please excuse me while I rant, but I feel the need to vent ideology publicly. I just read a Ryan Avent post that I consider zero growth advocacy. I’m thinking about making this a post.
    Please exuse me while I vent.
    I think the effective increase in liquid energy supply will be beneficial to our economy in the medium term (for CAFE changes prior to the Obama’s) and wont affect our long term shift toward more efficient and cleaner alternatives.
    However, I think a much cheaper and effective way to increase our efficiency and potential productivity would be an informational campaign to combat efforts to slow traffic and the popular misinformation on efficient driving habits.
    We’d save much more fuel by improving the efficiency of our existing fleet than we will by attrition. And do it faster too.
    Our population is getting old, slow, and lazy. What people need to remember is that slow does not equal efficient. (Fast can also be inefficient; when its sloppy and reckless.)
    Faster acceleration is not significantly less efficient than slow acceleration. In fact, it’s generally more efficient, even before considering that it prevents, and speeds the clearing of, congestion and bottlenecks. (research Brake Specific Fuel Consumption)
    A car engine typically produces power most efficiently at about 3200RPM. It most efficiently delivers power to the road at about 2100RPM. But, more importantly, increasing the power delivered doesn’t decrease efficiency much until higher RPM, closer to 4000RPM. Gas consumption is actually lower at higher load and engine speed than at the low engine load and slow engine speed of gradual acceleration.
    Engines deliver power best at two spots. At low RPM and very light loads, such as for maintaining speed, and at higher RPM delivering larger loads, such as for more rapid acceleration.
    And higher cruising speeds are actually more efficient up until aerodynamic factors dominate at about 55MPH . (see EPA Fuel Economy guide and MetroMPG.com post Speed kills: testing MPH vs. MPG in top gear )
    Some observations that should put things into perspective: Driving increased pretty steadily until leveling off in about 2005. It peaked in Oct 2007, before prices spiked in spring 08. Despite the flat trend in driving, our fuel consumption continued to increase. You read that right. Fuel economy declined starting around 2005, despite our improving fleet fuel economy rating and no big increase in the amount cars on the roads (prior to then, fuel economy improved despite the great popularity of trucks and SUVs). Fuel economy didnt rebound until the gas price spike in 08 drove poor, stupid and slow drivers off the roads (Sorry about the pun. I didnt mean for it. Though I must admit, I like puns.)
    So long as people believe slow is efficient, high gas prices will decrease our fuel efficiency and was our time. (Except when lack of an economy leave our roads empty and free flowing.)
    What Im suggesting is not aggressive driving. Aggressive driving is defined as rapid acceleration and braking. What Im suggesting is that people should drive with ambition, with purpose and attention. By looking a head, drivers can make adjustments to speed using the accelerator pedal rather than the brake. With electronically controlled fuel injection, when cars are moving they can keep the engine turning with little or no fuel. It’s actually the braking that wastes fuel, not the rate of acceleration.
    It not our desire for more power that has kept fuel economy from improving. It’s buying more power, but failing to make use of it.
    People need to act with purpose. It’s when we’re constrained from acting meanifully that ambition turns into agression or we turn to dangerous distractions like phone calls, texting, and day-dreaming.
    Fat, slow, poor, and stupid is no way to go through life, its now way to run an economy, and its no way to prevent global warming. Its certainly no way to lessen the cost of global warming’s negative externalities.
    Thank you.

  16. GNP

    JDH wrote in the Washington Post: The reality is that no policy could have prevented a substantial increase in the price of oil between 2005 and the first part of 2008.

    I beg to disagree. A schedule of Nordic-level excise taxes on gasoline and related fuels would have prevented the substantial increase or certainly delayed it until many years into the future.

    Furthermore, the USA could have chosen to not aerial bomb innocent civilians in the Middle East ostensively for the purposes of enhancing petroleum security. The USA could also have cut its US$3 to US$4 billion in aid, mostly military aid, to Israel designed to help Israel secure the territories conquered in the 1967 War–a constant source of tension with many oil producers in the intervening years.

  17. Martin

    Just got done reading your article about how Gold is a poor investment, the one published around Dec. of 2005.
    I am a high school graduate and common sense told me in 2002 to put EVERYTING into metals, which I did. I could see the future way back then!
    How is it that someone like me can see the writing on the wall yet someone who should know can’t see the forest for the trees?
    By the way, I sold my house in S.D. in May of 2004 (one year too soon) because my common sense told me there was a problem. Why could I see that yet those with all kinds of educations failed to see any problems?
    I predict here and now inflation will surge, interest rates will surge (with as long of a delay the Fed could engineer) Gold will surge along with anything else that might protect ones wealth.
    It will be the 70′s all over again.
    Why do I make this prediction? Common sense tells me!
    The national debt can only be reduced via inflation. The overwhelming private debt can only be reduced via inflation.
    Foreigners hold a goodly portion of our debt, common sense says the Federal Government will do its best to solve our national debt problem by ripping off foreigners via inflation and domestic holders of debt will be acceptable “collateral damage”.
    All common sense.

  18. ReformerRay

    GNP say: “JDH wrote in the Washington Post: The reality is that no policy could have prevented a substantial increase in the price of oil between 2005 and the first part of 2008″.
    “I beg to disagree. A schedule of Nordic-level excise taxes on gasoline and related fuels would have prevented the substantial increase or certainly delayed it until many years into the future”.
    I think GDP is right. On the other hand, the only modification of Hamilton’s sentence needed is to insert “acceptable” between “no” and “policy”.
    In my opinion, Professor Hamilton could be of additional service to the nation if he would examine and evaluated policy options that are currently “unacceptable” with the goal of making them acceptable.
    U.S. demand can no longer control the world price of oil. But high taxes in the U.S. would impact world prices and would tend to isolate the U.S. from the effects of high world oil prices.

  19. AHenderson

    Very nice piece… very interesting comments above!
    One thing is for sure… world oil demand will increase! It’s not just transportation, petroleum is used in all types of applications including plastics. China, India and Brazil will significantly have a role in the increase.
    Another fact… although there is plenty oil here in the states we as a society do need to ween ourself off oil. Renewable and Bio-Fuels are the transition technologies that will be profitable until we get to where we need to be!
    See technologies at http://www.advancednrgsolutions.com for information on clean burning natural, bio-fuels, algae production systems (used for bio-fuel feedstock) and compressed air engine technology.
    I say learn from others… we know demand will increase and so will the price of oil… so why not benefit from it during our transition to renewable and alternative solutions. If you owned production like you do some stocks… when you go to the pump or you hear about high oil prices… your not complaining because you’ve purchased production at one price and then sold it at a profit!
    Companies can make money and reduce their carbon footprint by utilizing unused land and implementing algae growth farms around plants and factories… these farms use the CO2 to speed up the algae growth process. Algae oil is a bio-feedstock that does not compete with the food industry and the bio-mass has uses as well.
    All this info is on the above site.
    There are plenty of ways to make gains in these times… people just have to make educated decisions. You can make profits and not harm the planet in the process… Corporations are just like big waves that you have no control over… don’t fight them… learn from them… use what you have learned and benefit from it… enjoy thr ride!

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