NCPA - National Center for Policy Analysis

Energy Prices and the Economy

May 11, 2004

"Nine of the 10 U.S. recessions since World War II followed spikes in oil prices," says Dallas Federal Reserve Bank president Robert McTeer. But today there is less concern that oil price shocks will have an adverse economic effect.

Three factors explain why:

  • Shifts in the composition of output and investments in more efficient plants, equipment, homes and vehicles have cut the energy necessary to produce a dollar of gross domestic product by more than 50 percent since the early 1980s -- for example, in the airline industry, the average fuel per passenger mile has fallen by about 25 percent.
  • Today's price hikes aren't that severe; adjusted for inflation, crude prices would have to rise to $75 to $80 a barrel to reach their 1981 level, and gasoline would have to be $3.50 per gallon or higher.
  • Companies have more experience with higher energy prices and are less likely to misjudge the impact of expensive oil and natural gas on their own businesses and on others with whom they trade.

Oil has jumped to nearly $40 a barrel, pushing gasoline to record levels. Natural gas has been selling for more than $6 per million BTU, pricey for this time of year. The outlook suggested by futures markets puts oil at $30 to $32 a barrel and natural gas at $5 to $6 per million BTU.

Source: Robert D. McTeer (president and CEO, Federal Reserve Bank of Dallas), "The Gas in Our Tanks," Wall Street Journal, May 11, 2004.

 

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