The Energy-Efficient Economy Can Handle $100 Oil
Oil prices hit a record high of $92 a barrel on Friday and some analysts say oil could climb pass $100 soon. U.S. Treasury Secretary Paulson said yesterday that the continued rise in oil prices was "not a positive" for the economy, but downplayed its impact, noting both employment and the economy were still growing.
Not long ago, the general consensus would have probably been that $100 oil would certainly cause the economy to go into a recession, and yet we're almost at that point now, and the economy continues on its expansionary path, as Paulson suggests, with output and employment growing at a fairly health pace. What gives?
Perhaps one explanation is that the economy is getting so much more energy efficient all the time, see the graph above of our energy consumption (thousand Btus) per real dollar of GDP from 1949-2006, using these data from the EIA.
Compared to the early 1980s when the real price of oil was about the same as today, we are now about twice as energy efficient, requiring only about 1/2 of the energy consumption per dollar of real GDP in 2006 (8.75 Btus per dollar of real GDP) as in 1980 (15.13 Btus per dollar of real GDP).
Bottom Line: The energy-efficient economy of today is much better able to absorb higher energy prices than in the past. Although high oil prices crippled the economy in the 1970s and early 1980s, and contributed to three serious recessions between 1973-1982, the energy-efficient Energizer Bunny Economy of the 21st Century just keeps humming along.