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What has happened to the share of energy in the U.S. economy since the early 1970s?
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Prior to the embargo of 1973-74, total energy expenditures constituted 8 percent of U.S. gross
domestic product (GDP), the share of petroleum expenditures was just under 5 percent and
natural gas expenditures accounted for 1 percent. The price shocks of the 1970s and early 1980s
resulted in these shares rising dramatically to 14 percent, 8 percent, and 2 percent respectively,
by 1981. Since that time, the shares have fallen consistently over the last two decades to current
levels of about 7 percent for total energy, while petroleum has fallen even further to 3.5 percent
and natural gas to just over 1 percent. The shares were lower during 1998, when oil and natural
gas prices were lower, but have risen recently in response to higher oil and natural gas prices.
(Figure 1)
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Part of the reason for the overall decline in the energy shares is the decline in the world oil price
from its peak in 1981. The other reason is the steady decline in energy intensity, measured by
energy consumption per dollar of GDP. This ratio has declined due to structural shifts in the
economy and improvements in energy efficiency. (Figure 2)
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Although the U.S. has reduced its use of petroleum as a share of its economy, there is a growing
dependence on imported oil. In 1973, net imports of petroleum made up 35 percent of petroleum
product supplied (consumption). For 2000, this share has risen to over 50 percent and is
expected to reach 64 percent by 2020. (Figure 3)
What does history tell us about how energy prices affect the economy?
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Viewed from a long-term perspective, inflation, measured by the rate of change in the consumer
price index (CPI), tracks movements in the world oil price. Not only do oil and other energy
prices constitute a portion of the actual CPI, but downstream impacts on other commodity prices
will have a lagged effect on the CPI inflation. (Figure 4)
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Looking from the 1970s forward, there are observable, and dramatic changes in GDP growth as
the world oil price has undergone dramatic change. The price shocks of 1973-74, the late
1970s/early 1980s, and early 1990's were all followed by recessions, which have then been
followed by a rebound in economic growth. The pressure of energy prices on aggregate prices in
the economy created adjustment problems for the economy as a whole. (Figure 5)
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In the past year, forecasters have acknowledged that higher energy prices can become a drag on
the overall economy. Initially, overall CPI inflation was still very low, principally because
inflation in commodities other than energy and agriculture was extremely low. However, the
sustained high level of oil prices has begun to effect core inflation (minus energy and food)
through continued pressure on prices of other commodities, in the United States and worldwide.
And as historical events suggest, a downward adjustment in the growth of economic activity
might be expected. In 1999, the inflation rate for the Consumer Price Index (All Urban
Consumers) was 2.2 percent and the core inflation rate was 2.1 percent. However, during 2000
the CPI inflation rate rose to 3.4 percent, led by energy prices. Moreover, the core inflation rate
also rose to 2.4 percent. The economy was no longer able to absorb the energy price rise, and
higher energy prices began to affect prices of other goods and services. (Figure 6)
How are these events shaping the forecast of economic growth for the near term?
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Most forecasters are suggesting that a soft-landing for the economy is probable, with a
significant reduction in expected growth in the next year, but with no recession. The table below
shows forecasts for the year 2001 from four groups. The forecasts done in January for the year
2001 indicate expected growth in the 2.4 percent to 2.8 percent range, clearly less than the
growth of 5.0 percent that took place in 2000. Note however, that the DRI, WEFA and EIA
forecasts prepared one month earlier in December, projected higher growth for the year 2001
than the forecast in January. Forecasts in February and March revised projected growth further
downward because of the trends indicated by new data.
| Comparison of Forecasts for the Growth Rate of Real GDP for 2001 |
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December 2000 |
January 2001 |
February
2001 |
March 2001 |
| Standard&Poor's DRI |
3.1 |
2.5 |
2.1 |
1.7 |
| The WEFA Group |
3.0 |
2.8 |
2.0 |
1.8 |
| EIA, Short-Term Energy
Outlook (STEO)* |
3.2 |
2.6 |
2.2 |
1.9 |
| Congressional Budget Office |
|
2.4 |
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| * Since the EIA forecast is a modified version of the DRI forecast, the date for the EIA forecast is
the month of preparation of the macroeconomic forecast and matches up with the vintage of the DRI
and other forecasts. The STEO based on this macroeconomic forecast is released one month later
when the energy forecast is complete. The March forecast of 1.9 percent GDP growth will support
the April STEO.
Sources:
- Standard&Poor's DRI, The U.S. Economy, issues 2000/12, 2001/1, 2001/2 and 2001/3.
- WEFA, US Outlook, issues December 2000, and January, February and March 2001.
- Energy Information Administration, Short-Term Energy Outlook, http://www.eia.doe.gov/emeu/steo/pub/contents.html
- Congressional Budget Office, http://www.cbo.gov/showdoc.cfm?index=2727&sequence=3.
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It is important to note that, while energy prices and events have contributed to the slowdown,
there are many other events that have affected the economy in the past two years. For example,
between June of 1999 and May of 2000, the Federal Reserve Board's Federal Open Market
Committee made a number of upward adjustments in the federal funds rate citing concern about
the risk of rising inflation while providing for sustainable economic growth. In total, the federal
funds rate rose by 175 basis points during this period. In January of 2001, the Federal Reserve
Board expressed concern about weakening sales and production, lower consumer confidence,
tight conditions in some financial markets, and high energy prices sapping household and
business purchasing power. In response to these conditions, the Federal Reserve Board twice
lowered the federal funds rate in January by 50 basis points for a total reduction of 100 basis in
one month. In March the federal funds rate was lowered another 50 basis points.
How has the economy reacted to the volatile energy prices of the past four years?
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Most of the recent concern about energy prices has focused on their rapid rise beginning in the
second quarter of 1999 to the present, with less attention given to the decline in energy prices
during 1997 and 1998. Looking back to the first quarter of 1997(1997:1), the world oil price
expressed in nominal dollars per barrel fell from $21.02 to a low of $10.86 in the first quarter of
1999. Then, in the second quarter of 1999, the world oil price began to rise dramatically,
ultimately almost tripling to a high of $29.11 in the third quarter of 2000. The path for the
wellhead natural gas price was less volatile than for oil between 1997:1 and 2000:1, fluctuating
between a high of $2.63 per thousand cubic feet to a low of 1.76. However, beginning with the
second quarter of 2000, the wellhead natural gas price increased dramatically. From the first
quarter to the second quarter of 2000, the wellhead natural gas price rose from $2.26 to $3.06
and by the fourth quarter to $5.19 per thousand cubic feet. (Figure 7)
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Each of these events -- first falling, then rising energy prices -- undoubtedly had effects on the
growth of the economy. To assess the economic impacts of these rapidly changing energy prices,
EIA compares two cases:
(1) the Volatile Energy Price case mimics the energy price percent changes seen from the period
between 1997:1 to 2001:1. This includes the prices movements for petroleum, natural gas, coal
and electricity; and
(2) the Steady Energy Price case assumes steady energy prices throughout the four-year period.
Figure 8 shows the alternative paths for the world oil price. Other energy prices were done in a
similar fashion.
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Two distinct patterns emerge. During the two-year period from 1997:1 to 1999:1, falling energy
prices boosted the economy. If energy prices remained steady over this period instead, the
growth rate of GDP may have been reduced by 0.3 percentage points (Figure
9). However,
during the next two-year period from 1999:1 to 2001:1, energy prices first rose dramatically, then
began to decline again. If this rapid rise in energy prices had not occurred, there may have been
as much as 0.7 percentage points of additional GDP growth. Over the entire four-year period, a
steady energy price path could have potentially boosted GDP growth by 0.2 percentage points.
In interpreting these values, keep in mind that any attempt to make a judgement about what might
have occurred in the past based on an hypothetical experiment, cannot fully account for the
dynamic events which shape history. Nonetheless, such an experiment can help to provide
insights about the likely direction and potential magnitude of impact.
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Volatility matters for all consumers and producers in the economy. Business firms, both energy
and non-energy, make investment decisions based on expectations about prices. If decisions are
made on the expectation of low (or high) energy prices, and the energy market varies sharply
from these expectations, firms may make inappropriate investment and business decisions. Even
those firms that expect volatility may be adversely affected by simply putting off a decision until
the market is more stable. Consumer purchases of housing and consumer durables such as autos
and appliances are also affected by instability in energy markets. The economy would most
likely perform better with stable or predictable energy prices, than when the price of energy
fluctuates greatly.
How will oil price movements affect other countries?
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Similar to the U.S., all countries stand to experience higher inflation due to rising oil prices.
While the U.S. has been successful in reducing its dependence on oil from a consumption-per-unit of output perspective, this is not the case in many other countries, where oil use is key to
their developing industrial and transportation sectors. Moreover, for the U.S., the net import
share of total oil consumption is above 50 percent, and this share is expected to rise steadily in
the future. Other countries face the same prospect. Higher oil prices have direct and dramatic
effect on the trade patterns between countries. Here, trade in oil is just one side of the story. As
higher oil prices get translated into higher commodity prices, there are likely to be changes in the
prices of non-energy exported and imported goods which will affect trade beyond just the oil
accounts.
Contacts: Ronald Earley (rearley@eia.doe.gov, 202/586-1398)
Kay Smith (ksmith@eia.doe.gov, 202/586-1455)
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