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January 08, 2007
Are We Really Less Dependent On Oil?
Austin Goolsbee made a little noise last week, writing in the New York Times that the answer is yes:
... the data shows that much has changed since the wrenching days of the 1970s, for American industry at least. The energy used for each dollar of gross domestic product in 1980 was almost 70 percent greater than it is today. While we have collectively wrung our hands over the decline of manufacturing in the country, it has also reduced the relationship between energy prices and growth.
Greg Mankiw accepts the claim that
... energy prices have a smaller impact today than they did in the past.
... and Mike Moffatt was prompted to muse:
The relationship between the decline of manufacturing in the United States and the reliance on foreign oil is an interesting one.
The facts are the facts on the fairly dramatic increase in energy efficiency in US production, but if there has been a declining impact on economic activity, that looks like a fairly recent development:
The shaded bars in that picture are NBER recession dates. You only have to go back a few years -- to the 2001 recession -- to find a significant energy shock looking for all the world like the partner of an economic downturn. Just like the four recessions that preceded it.
Of course, as I have noted here before, it's possible that the correlation of energy price spikes and recessions in the 70's, 80s, and 90s was just a coincidence. But it's also possible that the run up in energy prices over the past five years has indeed had a significant negative impact on economic activity, despite the fact that the tipping point into recession has not yet arrived. Let's call the effect of energy shocks on the economy an open question.
As for a decline in dependence on foreign oil, it hasn't happened. Here's an updated version of a picture I showed some time ago, capturing energy consumption relative to GDP versus production relative to GDP:
As I wrote in my earlier post:
As we entered the latest series of oil shocks in 2002, energy efficiency -- measured by the quantity of energy usage per inflation-adjusted dollar of GDP -- had fallen significantly from 1970s levels. Energy dependence -- measured by the gap between consumption and production per unit of GDP -- has, on the other hand, remained remarkably constant. That says to me we should not be so quick to dismiss analogies with the situation in the 1970s.
The headline to Professor Goolsbee's article was "A Country Less Dependent on Oil is Free to Make Other New Year's Resolutions." I think maybe we shouldn't change that resolution just yet.
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