The Oil Drum

68 comments on Is the Economy Less Sensitive to an Oil Shock?

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mw on October 19, 2005 - 3:16am

The only reason current events have had far less impact on the economy than the events of the 1970s is that there has been no reduction in supply!.

Agree completely; in the past I've been hammering on the fact that historically, in modern times, the only big change in oil usage came about as a result of a forced diet, and as a consequence yes oil demand went down for an extended period of time.

Until proven otherwise I believe we'll find that demand reduction bottoms out - last week's EIA numbers might even already be showing a levelling out of demand reduction. Once demand stops falling - and history says it will, unless a severe multi-year recession sets in - inexorably demand will resume its rise again.

As for energy efficiency being better now than 20, 30 years ago, that position holds no water at all... I'm surprised Greenspan can even hold his wooden face steady without laughing out loud while saying it.

What's different now than before is we import ever more "stuff" from overseas; all the energy (oil) put into the production of those products is off-balance sheet energy that doesn't go on our books.

Example

1,000 jeans = 50 barrels of oil in the US

Tack that 50 bbl * however many jeans / 1000 and we arrive at an annual figure. That figure becomes part of our annual energy intensity number for the year.

Suddenly, Enterprizing Ernie has a brain wave... lets "outsource" the manufacturing of all those jeans... to China or Vietnam or somewhere that they can be made dirt cheap. It still takes the same amount of energy, roughly, to run a sewing machine and factory there as does here... so we aren't saving on energy but on labour of course.

But... that 50bbl * however many IMPORTED heans / 1000 gets taken off our books and put on someone elses. We are just consumers now buying a finished product, and our consumers were going to drive to the store anyway, no matter where the jeans are made.

Take all these outsourced products -- look at the growing trade deficit for an appreciation for how much energy utilization in manufacturing that we are moving off our books onto someone elses -- and add it up.

Whether its consumed here or there its still consumed and provided world wide recession or worse isn't about to attack the world for years, we can be sure that even more useful and useless products will be bought by western nations so that developing economies can use even more energy building the stuff so we can continue to live in a fantasy land that we are getting substantially more out of every barrel when in fact we are simply passing the buck off to another economy.

It doesn't matter whether the pants Billy Joe bought her daugher Becky Sue were made in Italy or China or New Jersey..., except that we hardly manufacture anything in North America any more and have simply been displacing the energy utilization from our shores to some one else's... from our ledger to another's.

Hide the cost in someone elses balance sheet. Its an old trick.

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Stuart Staniford on October 19, 2005 - 3:24am

I doubt it's as big an effect as you think Mike. Again, 80% of the economy is houses, cars, and food and beverages. House production and food production have probably not gotten offshored much at all. And cars only somewhat (until very recently) since the increase in imports in cars has been offset to some degree by the shift to trucks and SUVs. The offshoring is mainly going on in categories like consumer durables and clothing, but those are smaller categories in the overall economy.

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mw on October 19, 2005 - 4:07am

I dunno... these are pretty big numbers we are talking about, big numbers that keep repeating themselves month in month out.

In 1975 the US had a trade surplus and hasn't seen one since and likely never will again.

After 1975, oil got really expensive... and scarce, for a while.

Thus was born the need and desire to outsource to reduce costs, not to mention the fear of Japan taking over (remember those days?)

Its all inter-related, isn't it? Foreign imports reduced costs on other goods that otherwise, if were fully borne by The American Consumer, would mean they'd build smaller houses and other things.

So, the economy shifted gears and outsourced a ton of manufacturing overseas... literally millions of tons of manufacturing, annually. I happen to live in a massive port city and can assure you that all those containers coming into North America are filled with products made thanks to oil, somewhere along the line.

How big? Well lets first think about the impact oil itself has on the trade deficit, as clearly the advent of peak oil in the US has had a major impact on the deficit froom the 70's onward - increasing it as oil had to be imported, and also forcing outsourcing to other locales with cheaper labour to avoid inflation and keep the consumer spending.

The "trade deficit" is a simple balance sheet - what's really instructive is to look at the GOODS only number, and factor out the trade surplus that exists in services, and also seperate the oil imports. Census.gov gives all the numbers:

Some selected years... getting tired:
Goods only surplus/deficit:
Year Petroleum Non Petroleum
1990 -54,513 -47,205
1991 -43,617 -21,781
1993 -44,002 -71,567
1994 -44,315 -106,314
1995 -48,059 -110,742
1996 -63,119 -107,095
1997 -61,352 -119,170
1998 -42,828 -186,931
1999 -59,187 -269,634 (cheap gas and Internet fever!)
2000 -108,266 -327,839
2001 -114,658 -329,393
2002 -111,230 -408,126
2003 -118,693 -448,538
2004 -126,466 -522,922

Going from a trade surplus of 12 billion in 75 to a trade deficit of 600 billion or more but it would be worse if not for the exports of services and goods. The point I'm trying to make is that within the the next few years an annual deficit of 1 trillion dollars in goods will be hit.

1 trillion in goods = a ton of oil which is not on the US balance sheet.

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Stuart Staniford on October 19, 2005 - 4:24am

Sure - the trade deficit is 5% or so of the economy, and I'm happy to grant you that O(5%) of the energy savings per unit GDP come from outsourcing. Even 10% at this time of night and without going to do a real calculation. But we have a factor of 2 to explain since 1970. There's no way that's outsourcing - that has to mostly be efficiency gains. It isn't particularly hard to think things are 2x more efficient now - just remember what everybody was driving in the US in 1970.

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mw on October 19, 2005 - 4:52am

Sure... "consumer" efficiency has gone up.

My beef with Greenspan et al is that they glow on about how much less energy dependent the economy is... and while there is truth to that, in that some new industries have a low cost component of energy, the bottom line is that we are consuming (there is that word again) more than ever.

Besides... Hummers and 300 HP family wagons probably don't get much worse or better mileage than a souped up Dodge Charger of the past, which, ironically, is now reintroduced with a big engine.

That trade deficit is just going to get larger and larger as oil costs more and more, but somewhere there must be a limit to how much production one can outsource (for lower other costs) before the whole system breaks. On that note... time for a nap!

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mw on October 19, 2005 - 4:46am

Year     Nominal GDP
(billions of dollars)
1990     $5803.1
1991     $5995.9
1992     $6337.7
1993     $6657.4
1994     $7072.2
1995     $7397.7
1996     $7816.9
1997     $8304.3
1998     $8747.0
1999     $9268.4
2000     $9817.0
2001     $10128.0
2002     $10469.6
2003     $10971.2
2004     $11734.3

So the next question is... are these numbers big enough to be meaningful? Yes -- and growing more so rapidly:

http://www.trendvue.com/charts/2005/10/tv20051019-01.gif

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JD on October 19, 2005 - 5:40am

1,000 jeans = 50 barrels of oil in the US

Where exactly do you use oil in the manufacturing of jeans? Textile equipment is generally driven electrically, which in China probably means coal, not oil.

The top two most oil intensive industries in the U.S. are petroleum refining and chemicals, and neither has been significantly outsourced.

I think you can get a clearer view of oil intensity by simply looking at where most of the oil goes:

The rough breakdown for 2003 is:
Total oil consumption: 19.7 MMbpd
Transportation: 13.1 MMbpd
Autos/light trucks: 9 MMbpd
Medium/heavy trucks: 3.8 MMbpd
Jet fuel: 1.6 MMbpd
Feedstock: 3.5 MMbpd

Most oil is used to power private cars, SUVs/pickups, trucking and aircraft. Did any of those processes get more efficient, or get outsourced? I think the answer is no.