Guess what: rising energy prices are taking a toll on consumers.
On Monday the Bureau of Economic Analysis released details on personal consumption expenditures for February, allowing us to update our graph of how big a share energy is in American budgets. A 6% expenditure share marked the point at which we started to see significant consumption responses a few years ago. The share in February is essentially there (5.98%, to be exact), the highest it’s been since October 2008. For poorer households, energy’s budget bite is a significantly larger percentage.
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Not surprisingly, overall spending on other items is slowing down. Real personal consumption expenditures grew at a 3% annual rate in February after falling slightly in January.
Bill McBride (and you know I don’t like to argue with him) thinks this means real consumption spending for 2011:Q1 may only grow at a 1.4% annual rate. That’s less than half the rate that many analysts had been anticipating prior to Monday’s data.
You probably also know that gasoline prices have been climbing from their average values in February.
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| San Diego Historical Gas Price Charts Provided by GasBuddy.com |
Jim and I are quoted in the WSJ today, in an article by Don Luskin entitled, “Oil Prices Won’t Kill the Recovery.”
Hmmm. Right now, the 4% limit is about $88 / barrel crude. Brent’s at $115. On paper, this should be enough to put us into recession.
On the other hand, the recovery is providing momentum the other way. So, as Jim points out, the oil price is a drag, rather than a killer right now.
Do energy prices matter as a general principle, or oil prices specifically? I would postulate the impact is primarily related to mobility, hence, oil prices should matter more. But maybe not. Bill McBride’s not the only guy to avoid betting against.
Again, weak demand in developed countries, e.g., the US, since 2005 is not a new story. But the real story is increasing demand in developing countries. Oil consumption in the US and four developing countries for 1998 to 2009 (100 = 1998 consumption, EIA):
http://i1095.photobucket.com/albums/i475/westexas/Slide3.jpg
At Chindia’s 2005 to 2009 rate of increase in net oil imports, as a percentage of global net oil exports, Chindia would be consuming 100% of global net oil exports in 2025. As they say, somethings gotta give, and that something will largely be consumption in the US, as we will probably continue to be gradually priced out of the global net oil export market.
I think cost relative to disposable income. Or, more so, relative to disposable income after other non-discretionary expenses (food, healthcare, rent, etc.).
The decline in finance costs and housing cost has pretty much been offset by the continued rise healthcare. Disposable income has not been rising as fast as non-discretionary expenses, so I don’t think prices need to be nearly as high as 08 to grind things to a hault.
I think NDE/DI is already higher than 08. I think in 2004/5 NDE peaked a little higher than that, but I think that was because people were leveraging up. I don’t think that’s likely to happen again.
Goes to show that while the Fed has power to influence the real economy in the short term they could not get what they want in the longer term.
In Europe and more particularly in France,the marginal increased cost of energy may no longer be the most critical issue, when it comes to consumption.
The household debt is troublesome.
INSEE statistics of indebtness
To be read (1) Non financial, (2) households,(3) Public administrations
http://www.insee.fr/fr/themes/tableau.asp?reg_id=0&id=270
In relation to gross incomes, the household debt has steadily climbed from 32.47% in 1980 to 75.29% in 2009 and so did the public administrations.
Euro area 17 (fixed composition) – Final consumption of households and NPISH’s (private consumption), Current prices
http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=119.ESA.Q.I6.Y.1415.P31000.0000.TTTT.V.U.A
Euro area Income saving and investment
http://sdw.ecb.europa.eu/reports.do?node=100000750
Euro area 16 (fixed composition) – Maastricht assets/liabilities – General government (ESA95)-NCBs – All sectors without general government (consolidation) (ESA95) – NCBs – Financial stocks at nominal value –
http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=121.GST.Q.I5.N.B0X13.MAL.B1300.SA.Q
@Jefferey
“As they say, somethings gotta give, and that something will largely be consumption in the US, as we will probably continue to be gradually priced out of the global net oil export market.”
…Which IMHO would be one of the best things to happen for the US. Imagine the consequences: Americans would finally start to save energy and invest in renewable energy. Thus a significant amount of true value creation would be shifted back domestically. And a lot of wars the US is currently fighting would be rendered needless because then the Chinese had to take that “responsibility”.
So what will be Q1 GDP growth?
Is the POO rising primarily due to demand or fiat currency debasement?
Pigeon,
What renewable energy source can I drive my car with ?
Your ignorance of energy sources may only be topped by your ignorance of the marketplace. Its most likely a tight race …
Pigeon,
I think that a more likely scenario is a systematic abandonment of a good deal of suburban infrastructure.
Jeff, it would be nice if we could have one civil corner in the market place of ideas.
How about bio-diesel or wood alcohol for renewable fuels you can drive your car with.
Pigeon, sorry you hate suburbs, but there is no reason to believe that substitution, either of capital for more efficient vehicles or of goods for a non-oil energy source won’t prove cheaper than abandonment of infrastructure.
It’s not clear to me that the suburbs will be abandoned. Rather, the prices of existing suburban real estate will tend to fall to compensate for rising oil prices.
Further, I think we may well see additional migration of jobs to the suburbs. Many businesses are now location agnostic, and businesses may move closer to homes rather than vice versa.
On the other hand, it is reasonable to pre-suppose that incremental housing development would tend to value proximity to jobs and services over size of living space.
James,
I have sympathy with the intent of your question but in truth the price of oil is up right now because of political instability in the middle east. If there was no threat to oil supplies the price or oil would probably be between $85-$95.
Normally QE2 would have pushed up prices but there have been so many counter actions by the FED and Treasury that the impact has been virtually nil.
I am still expecting the price of oil and gasoline to fall later in the year.
As for the abandonment of suburban infrastructure, I don’t think that will happen when a 3 bedroom house with land can be had now for 300k while that would get you a studio in the city. Gas would have to be a whole lot more expensive to make that happen.
And renewable energy is great, but on a practical level, the big question is how do we get people to drive less? Of course the answer is efficient public transportation. It’s an idea that we take for granted in those older eastern cities but seems to be some sort of socialistic idea to people elsewhere. I LOVE taking the train to work in the city, or taking the subway. I don’t have to sit in traffic, I save a bundle in tolls and parking, and it’s easier than flying sometimes too on the east coast. High speed efficient rail would be a way to go, except in certain political circles…..
If expensive gasoline in the US will lead to huge breakthroughs, why hasn’t expensive gas in Europe already produced those breakthroughs?
Is it because Americans are so much smarter than Europeans?
Or, is the “expensive leads to breakthroughs” theory wrong?
Steven, I like your comments about oil policy. I think there is a range of estimates for a break point and that your number is on the lower end.
Unlike the government, I can’t spend money, I don’t have!
Andy, the theory is not wrong, it’s just that, like everywhere else in economics, there are diminishing marginal returns.
We’ve made the big tech breakthroughs on the vehicle side. What we have now is a decay of civilization. We forgot basic principals our grandparents knew, but we are yet to re-learn: Slow is not efficient; Freight and passengers should use separate systems to the extent possible and rail is best used for freight, not people.
There is also a new one, since electronically controlled fuel injection, quick smooth acceleration is actually more efficient than slow acceleration.
Misconceptions in the public mean that the they do things that make congestion worse (more stop-go per car on the road) when prices rise.
Here are some excerpts from an essay that I am working:
Will We Be Able to Maintain & Replace Our Energy & Transportation Infrastructure in a Post-Peak Oil World?
Developed countries worldwide are facing enormous financial costs associated with maintaining and ultimately replacing their aging energy and transportation infrastructure, consisting of items such as pipelines, refineries, powerplants, electric transmission lines, roads, bridges, tunnels, dams, etc. Given the reality of an energy constrained global economy, especially in the context of a long term decline in global net oil exports, it seems inevitable that—at best—our current energy and transportation infrastructure will only be partially replaced in future years. . .
Jim Kunstler famously called American suburbia the “Greatest misallocation of resources in the history of the world.” In a number of books and lectures, Jim has described how the US had a pretty good and highly energy efficient urban system, up until immediately after the Second World War, when the long national nightmare of out of control suburban development really began.
I would agree that the Late Forties was really the inflection point, for a number of reasons. First, the Late Forties was the really the starting point for the post-war boom in the US. Second, in 1948 the US slipped into net oil importer status, after serving as a primary source of oil for the Allies in the Second World War only a few years earlier. Third, 1948 marked the high water point for many urban electrified rail mass transit systems, e.g. in the Dallas/Fort Worth area in the Forties there were up to 250 miles of electrified streetcar lines in 1948, connected by a regional electric interurban rail system, all of which began to abandoned in 1948.
So, how should we address the problem of failing infrastructure in an energy constrained future?
I have previously argued that we need to look at a triage plan. The simplest triage approach, given a mass casualty event, is to divide survivors into three groups: (1) Those who are likely to survive, regardless of the care that they receive; (2) Those who are likely to die, regardless of the care that they receive and (3) Those for whom immediate care might make a difference in outcome.
If we apply “Triage Rules” to infrastructure, we need to focus dwindling resources on areas that can be rehabilitated.
Of course, at least for the time being the probability of a serious discussion, let alone implementation, of an infrastructure triage plan is somewhere between slim and none.
On an individual basis, I would suggest that one consider living in an area that was doing well with the infrastructure and energy consumption levels that we had in the Late Forties.
Unfortunately, when one considers population growth, total US oil consumption, even at Late Forties per capita levels, would still be quite high. US per capita oil consumption in 1949 was 14.2 BO (barrels of oil) per person per year. In 1978, US consumption had increased to 30.8 BO, before beginning to decline. In 2005, the US consumed 25.6 BO, falling to 22.8 BO in 2009 (EIA & Census Bureau).
In terms of total volume consumed, in 1949 the US consumed 5.8 mbpd (million barrels per day), increasing to 20.8 mbpd in 2005, falling to 19.3 mbpd in 2009.
However, the US population has increased from 149 million people in 1949 to 309 million people in 2010. So, even if, or more likely when, US per capita consumption falls back to 1949 levels, the US would still be the world’s largest oil consuming country, consuming about 12 mbpd. Interestingly enough, note that France’s per capita annual oil consumption in 2005 (12 BO, Nationmaster) was well below the US per capita annual oil consumption in 1949 (14.2 BO).
Therefore, as low as our per capita oil consumption was in 1949, it seems likely that a 1949 per capita consumption level will only be a milepost along our path to a much lower level of per capita oil consumption.
“Jim and I are quoted in the WSJ today, in an article by Don Luskin entitled, “Oil Prices Won’t Kill the Recovery.”
Which is true only for the stock market as the rest of the article is pure garbage. At this point, the market doesn’t care that Americans can’t afford to fill their bloated vehicles or heat/cool their bloated homes. There is an entire world of people who drive high efficiency vehicles and live in reasonably-sized homes that have far more disposable income because of it. Americans rejected public transportation for the most part and, unfortunately, it was the wrong choice.
Love you Steve and Jim, but I agree with Karma Police, kinda.
What he says is garbage. And oil prices probably won’t technically kill the economy, but I think for all practical reasoning they will.
The reasons certainly have nothing to do with vehicle efficiency or public transportation. Somehow we forgot what our grandparents knew; Slow is not efficient, rail is most efficient for large masses (ie, it great for freight, not people), and varience is the biggest killer of efficiency (ie, we need to seperate freight and passange travel to extent we can).
The thing is, the non-core components have been rising faster than core, even considering supply shocks. This means loose monetary policy will inflate non-core products faster than core. Disposable income has been rising far less. That means the non-core items consume dollars that would go to core, savings, or investment. It also means that demand for savings increases (like in you paper). This puts very strong disinflationary pressure on core.
When core goes down (or doesn’t rise as expected), it then puts downward pressure on non-core (lower expectations of growth bring non-core prices back down).
This is the dynamic that must be broken for a really real recovery.
We don’t give small business the tools to do what they are meant to do – create jobs. With consumers under- or unemployed, they have no discretionary income and no non-discretionary income with which to pump up business sales.
Sure, financing costs and housing costs for individuals have declined, but Americans are totally unprepared for rising energy costs after being lulled into a false sense of security for so many years. Add to that inflationary pressures on commodities dripping down to the grocery store and kitchen table levels and no income with which to buy hybrid vehicles, what’s the average America to do? Then consider rising health care costs.
Americans aren’t going to abandon the suburbs because they can’t afford to, particularly not for the low-paying jobs currently available and with all the other financial pressures. They can’t sell their suburban homes at the current historical lows in home values to buy anything close to comparable in the city.
High speed rail is obviously one answer but we abandoned that long ago. It will take forever to revitalize that concept and make it real.
Public transit is a bust.
Reading the National Transit Database, the data shows why no city can afford to implement it:
Mode Total cost per passenger mile
Light rail $3.28
Commuter rail $1.78 (Diesel trains)
Heavy rail $0.89 (NY, BART, Boston)
Bus $1.28
Car [$3 gas] $0.55
Car [$4 gas] $0.58
Car [$5 gas] $0.62
Air $0.20
Clearly the car is the winner until we can figure out automated transit.
Re: Realist
Could you provide a link to support your numbers?
Here is a link to what appears to be a reasonably well researched (and referenced) Wikipedia article on energy efficiencies for various modes of transportation:
http://en.wikipedia.org/wiki/Fuel_efficiency_in_transportation
In any case, the critical problem that we are facing, based on our work, is the combination of a long term decline in global net oil exports and rising net oil imports into developing countries, especially “Chindia.”
Not only is electrified rail more efficient that personal autos, electrified rail can be powered with non-petroleum energy sources. As noted up the thread, my view is that we are going to be either voluntarily or involuntarily abandoning outlying suburban and exurban areas in future years in the US.
Gentle fellow oil-dependent human apes,
The price of oil adjusted for the US$ and CPI is at the level at which every major US recession occurred going back to the onset of the Oil Age in the 19th century.
Moreover, the CPI-adjusted prices of oil and gasoline are back to the levels of late ’79 to early ’80 and spring-summer ’08 when the economy tipped over into the worst recessions since the Great Depression, and the stock market experienced among the worst inflation-adjusted declines in US$ terms in US history.
The effects of higher energy costs are passing through quickly to business inputs and consumer prices for food and other related items, implying that profit margins will be squeezed, and discretionary consumer spending will decelerate significantly.
Our US supranational firms continue to invest tens of billions of dollars each year in China-Asia to produce goods for the US market and intra-Asian “trade” between US subsidiaries and contract producers. With GDP PPP and oil consumption parity between the three major global trading blocs, China-Asia’s rapidly growing demand for oil (8-10%/yr.) means that oil exports and consumption are in a zero-sum situation in which China-Asia grows only as long as US firms continue to invest and at the expense of net growth in the Americas and EU.
Overall, however, Peak Oil and population/ecological overshoot means that global real private per capita GDP growth is over, permanently.
The average US light vehicle costs about $28k, and gets 23MPG.
A Prius costs less, and gets twice the MPG.
Why won’t people just move to a hybrid or EV, rather than abandoning suburbia???
I’m certainly not suggesting complacency. I think fossil fuels in general, and oil in particular, cause enormous harm, and should be replaced ASAP. On the other hand, we’re not facing the apocalypse.