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Monday, April 12, 2010

More on Oil's Impact on Consumption

Last Friday, I asked "at what point does the price of oil become debilitating?".

Fortunately for me, James Hamilton attempts to answer that question. First, he points out the concern:

Ten of the 11 recessions in the United States since World War II have been preceded by a sharp increase in the price of crude petroleum. Oil had been holding around $80/barrel over the last month, but traded as high as $87 last week, leading the Financial Times to ask whether oil could give the "kiss of death to recovery."
Before we jump to his conclusion, lets take a look at what James states the spike in oil price from 2009 lows means to the consumer.
Americans buy a little less than 12 billion gallons of gasoline in a typical month. With gas prices now about a dollar per gallon higher than they were a year ago, that leaves consumers with $12 billion less to spend each month on other things than they had in January of 2009. On the other hand, the U.S. average gas price is still more than a dollar below its peak in July of 2008.
12 billion gallons per month of gasoline is a lot, but according to the EIA, total crude use is almost double the level used in gas (about 18.5 million barrels per day x 42 barrels per gallon x 365 days / 12 months = 24 billion gallons per month). Using this "total" level and comparing it to personal income based upon market prices at each point, we can see how much of a drag the spike in oil would have impacted 'consumption ex oil'. We can also see why "this time" may not be so bad... the overall level of personal income that is allocated to oil is currently not much higher than what we saw pre-crisis (and much lower than 2008 levels).

Another way to look at this data is as a change over one and two year periods.

So while perhaps not a drag, the concern I have is that the price of oil is no longer the source of "stimulus" it was when the price of oil collapsed and Americans found themselves with much more disposable income (as much as 4% more to be specific).

In James Hamilton's post, he provides details for some indirect reasons higher oil prices caused a drag on the economy as well (reallocation of capital away from American business [i.e. small cars]) that he does not see re-emerging and concludes:
So to return to the question posed at the beginning: $87 oil is certainly not helping the recovery. But I would be very surprised if it proves to be the kiss of death.

Personal Income: BEA
Oil Prices: EIA
Total U.S. Crude Consumption: EIA