Energy Prices and U'S' Economic Activity

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Energy Pricesand U.S. Economic Activity

• Stephen Brown
• Federal Reserve Bank of Dallas

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Oil price shocksand U.S. recessions
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Overview

• Oil and gasoline prices
• Natural gas prices
• Economic effects of higher energy prices
• slowing activity, inflationary pressure, higher
  interest rates
• no recession

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Oil Price Near Record High
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Why oil prices are high

• Strong growth of world oil demand has pushed OPEC
  close to capacity
• Lack of excess capacity has exacerbated fears
  about supply disruptions
• Weaker dollar

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Oil Consumption and GDP per Capita, 2002
Barrels per capita
162,755
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OPEC Near Capacity
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Oil Supply Trouble Spots

• Nigeria
• Venezuela
• Iraq
• Iran

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Euro and Yen Prices Rise by Less
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Oil price outlook

• World Demand continued growth
• price-induced conservation
• Growth of Supply
• abundant resources developed quickly?
• nearing peak oil production?
• abundant resources developed slowly?
• What about alternatives?

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Oil Prices to Remain High
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Gasoline Prices High
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natural gas prices were tracking oil

• Hurricanes Katrina and Rita changed all that
• temporarily

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Natural Gas Prices Rise with Oil
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Natural Gas and Oil Prices Decouple?
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Natural Gas Supply Wouldnt Keep Pace with Winter
Demand?
Expectations
Reality

• Gulf natural gas production slow to recover from
  hurricanes
• Average to colder-than-normal winter
• Higher prices wouldnt curtail consumption

• Gulf natural gas production slow to recover from
  hurricanes
• Warmer-than-normal winter weather
• Higher prices have curtailed consumption

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natural gas storageheaded for all-time record
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Natural Gas Prices
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Natural gas price outlook

• Generally track oil prices
• Can vary with market conditions
• Technical supply feasibility suggests natural gas
  at 3.50-4.50 per million Btu
• More likely is 7 per million Btu

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economic effects
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Classic supply shock
Labor
Output
Capital
Energy
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Classic supply shock
Labor
Output
Capital
Energy
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Classic Supply Shock
Price Level
Real GDP
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Classic Supply Shock

• Real GDP falls
• Price level rises
• Interest rates rise
• if people expect shock to have a greater effect
  in the short run than the long run

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Economic effects ofhigher energy prices

• Assumptions
• Oil prices tripled
• Natural gas to maintain historical relationship
  with crude oil prices

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Economic effects ofhigher energy prices

• Real GDP loss of 2.4-3.2 percent
• combined effects of oil, natural gas, coal
• GDP deflator boosted about same amount
• Some upward pressure on short rates
• Most of these effects are behind us

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Only Mild Economic Effects?

• Oil prices have risen over several years
• Oil price partially demand driven
• Reduced energy-to-GDP ratio
• More experience with energy price shocks
• reduced adjustment costs

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Regional Effects
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Regional Effects Uneven

• Energy-intensive industries most hurt
• Energy production helped
• Regions with energy-intensive industries hurt
• Energy-producing regions helped

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Higher Oil Prices andState Economies
Helped
Hurt
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Conclusions

• Oil prices to remain elevated
• Natural gas prices on par with oil
• A slight drag on U.S. economic activity
• Effects uneven across the states

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