Explaining The Oil Conundrum

Investor's Business Daily 21nov2007

[See commentary by Jan Lundberg below graph]

Many people have puzzled over why the economy hasn't had a downturn, despite oil prices pushing $100 a barrel. The answer is simple: The US uses far less oil and gas today to produce a dollar of GDP. So even when the use of energy rises, and the price goes up, the overall impact on the economy is still less. Indeed, since 1973, the year of the first oil embargo, our energy efficiency has improved by roughly 58%, after adjusting for inflation.

Oil and gas consumption

Source: Energy Information Administration

KEY

A - Total energy use, quadrillion Btu, left scale
B - Total energy use, 1,000 Btu per dollar of GDP, (in 200 dollars) right scale
C - Recession

Commentary by Jan Lundberg

Periodically we are told that because of more efficiency in energy per capita used to generate the Gross Domestic Product, the economy is immune to high oil prices. This is a bogus notion, as people have to work harder and longer than ever because of, I believe, the high hidden cost of energy. The calculation that U.S. energy efficiency is over 50% greater per dollar of GDP compared to 1973 (after adjusting for inflation) implies that such efficiency is significant enough to propel the economy right along with record high oil prices. The claim is also another way to deny peak oil's supply squeeze, as if economics will right everything. There has indeed been energy efficiency improvement since the Arab Oil Embargo, but the real reason for our not feeling the pinch so hard as oil gets way up in the known, official price is that we have ALREADY been paying through the nose all along via subsidies, hidden and otherwise. The tremendous increase in consumption has created vulnerability for supply crisis and economic and ecological collapse on a colossal scale, ignored by mainstream economists and oil "market experts." Per capita efficiency gain is cancelled out by growth.