A monthly report produced for Commerce Real Estate Solutions by Stephen P. A. Brown, PhD, Center for Business & Economic Research University of Nevada, Las Vegas Issue 15 March 2012 To receive this newsletter by e-mail, please subscribe at www.comre.com/subscribeWill an Improving Economy BeDragged Down by Higher Oil Prices?The high gasoline and jet fuel prices seen in March and April raise concerns about the possibilitythat high energy prices will lead to yet another economic slowdown. Although high gasolineprices are visible and alarming, current energy market conditions are unlikely to push the U.S.economy back into recession. The gains in oil prices that produce higher gasoline and jet fuelprices have not been enough to trigger a recession.In addition, oil prices are likely to play less of a role in had oil prices not risen, the economy would have merelycurrent U.S. economic conditions than the past. Other slowed down rather than downshifted into recession.energy prices—particularly those for natural gas—have In early 2012, oil prices have not shown the sharpnot moved with prices for oil and petroleum products. increases that signal that a recession is imminent. ThatThe U.S. economy has become much less dependent is, oil prices have not risen to the point where they areon energy. As a result, high oil prices mean much less higher than they have been during the past three years.headwind to overall economic activity than in the past. In addition, the future market shows oil prices fallingCurrent Oil Prices Are Not at Recession-Producing from current levels, rather than heading upward to theHeights heights necessary to cause a recession.The United States has seen a number of episodes in Falling Natural Gas Priceswhich oil prices rise sharply and are higher than had History suggests oil and natural gas prices movebeen seen in the previous three years. These episodes together. In fact, economists Stephen Brown andhave preceded all but two of the U.S. recessions since Mine Yücel found weekly movements in natural gasWorld War II. The two exceptions are the 1960 and prices from 1994 through 2007 are well explained1970 recessions.1 by movements in oil prices in a model that takes intoSharply rising oil prices also provided false signals in account seasonality, variations in weather, natural gasthe mid-1990s and from 2002 to 2005. In addition, in storage, and disruptions in natural gas productionmost attribute the 2008-2009 recession to a financialmarket meltdown rather than the 2007 oil price spike.Nonetheless, economist James Hamilton argues that This report is commissioned by Commerce Real Estate Solutions email@example.com • 801-322-20001 James D. Hamilton, “Causes and Consequences of theOil Shock of 2007-08, Brookings Papers on Economic Activity,”Spring 2009, pp. 215-84.
nevada’s Economy March 2012caused by hurricanes in the Gulf of Mexico.2 That relationship between movements in oil prices andhistorical relationship seems to have broken down as energy purchases as a share of U.S. GDP has changednatural gas prices have diverged from oil prices since considerably since the 1970s and 80s. In the 1970s andearly 2009—continuing to fall as oil prices rise. early 1980s, there was a tight relationship betweenThe divergence of natural gas prices from oil prices oil prices and overall energy prices. In addition,has been created by the technological revolution in considerably more energy was used to produce GDPproduction of natural gas from shale formations. The than is the case today. As a result, energy purchases ascombination of horizontal drilling with hydraulic a share of U.S. GDP moved relatively tightly with oilfracturing (aka fracking) has led to a substantial prices.reduction in the cost of producing natural gas from In early 2012, however, energy purchases as a share ofshale formations.3 GDP have not moved nearly as tightly with oil prices.As a result of the shale gas revolution combined with That fact, suggests that the sharp rises in oil prices seenthe weakness of the industrial sector coming out of in early 2012 will not have nearly as much impact onthe recession, the United States is awash in natural overall economic activity as previous history mightgas supplies, and natural gas prices have been pushed suggest.to extremely low levels. One consequence of recent Oil Price Shocks and U.S. Economic Activity: Thedeclines in natural gas prices is that overall prices paid New Wisdomfor energy in the United States declined in the first In early 2012, the sharp increases in gasoline and jetthree months of 2012—even as oil prices were rising. fuel prices brought about by higher crude oil pricesReduced U.S. Energy Dependence have raised concerns about the possibility of slowingU.S. economic output also has become substantially economic activity. Because natural gas prices haveless dependent on energy consumption over the past declined since mid-2011, however, the impact of oil40 years. In 1973, 15,414 Btu were required to produce price increases on the overall price of energy has beeneach dollar of U.S. gross domestic product (GDP). In substantially blunted. In addition, reduced U.S. energy2011, only 7,327 Btu were required to produce each dependence means that oil price movements have notdollar of U.S. GDP.4 That represents a reduction of led to large changes in energy purchases as a share52.4 percent. of GDP. These facts do not lessen the painful feeling at the pump, but they suggest that energy prices areWhen we combine the effect of reduced dependence creating much less headwind to overall U.S. economicon energy with the divergence of overall energy prices activity than they did in the past.from those for oil, an interesting picture emerges. The2 Stephen P. A. Brown and Mine K. Yücel “What DrivesNatural Gas Prices?” The Energy Journal, 29(2), 2008.3 See Stephen P. A. Brown, “Abundant Natural GasCould Mean a Paradigm Shift in U.S. Energy Markets andPolicy,” Resources, Summer 2010.4 GDP is measured in 2005 constant dollars.Commerce Real Estate Solutions | comre.com
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