Is the Economy Less Sensitive to an Oil Shock?

Economists are fond of saying that the economy is changing and becoming more about high-tech low-energy materials and advanced services, not heavy matter-and-energy stuff, and therefore those nasty old 1970s style oil shocks wouldn't cause so much of a problem today. This has never made any sense to me, so I decided to investigate more carefully.

Firstly, the evidence that economists really do say things like this. Exhibit A is the esteemed Chairman Greenspan's remarks yesterday:

Much of the decline in the ratio of oil use to real GDP in the United States has resulted from growth in the proportion of GDP composed of services, high-tech goods, and other presumably less oil-intensive industries. Additionally, part of the decline in this ratio is due to improved energy conservation for a given set of economic activities, including greater home insulation, better gasoline mileage, more efficient machinery, and streamlined production processes. These trends have been ongoing but have likely intensified of late with the sharp, recent increases in oil prices.
which leads him to his later conclusion that
Today, the average price of crude oil, despite its recent surge, is still in real terms below the price peak of February 1981. Moreover, since oil use, as I noted, is only two-thirds as important an input into world GDP as it was three decades ago, the effect of the current surge in oil prices, though noticeable, is likely to prove significantly less consequential to economic growth and inflation than the surge in the 1970s.
Exhibit B comes from the Oil Drum's favorite economist, Professor Hamilton of Econbrowser, who in an earlier debate with me wrote:
Although I agree with his physics, I don't agree that the level of economic activity has any necessary connection to the amount of force being thrown around. Consider two of the areas in which we've seen the greatest economic growth over the last twenty years, computing and medical care. Today you can perform something like 50 billion floating point operations per second for 5 watts of electricity. Stuart could do a much better job than I could of coming up with a graph of FLOPS per watt as a function of time, but I have no doubt that it would exhibit a spectacular rising trend. The reason is that the nature of technical progress here has been to make the physical dimensions of what is being moved around smaller and smaller-- today's computers are better precisely because they're trying to move electrons over shorter and shorter distances.

Or consider medical advances. Antibiotics, immunization, pharmaceuticals, and improved surgical methods have produced profound economic advances. We stand on the verge of almost inconceivable progress over the next century as we put into practical use our ability to read the genetic code of ourselves and our diseases. Here again what we actually need physically to induce are tiny events at the molecular level. Economic progress consists entirely of getting smarter at knowing exactly how to do that.

Nor are computers and health care all that exceptional. The graph at the right plots the ratio of the number of barrels of oil that the U.S. uses each year to real GDP (measured in year 2000 dollars). Year after year, economic activity has consistently grown at a faster rate than our physical consumption of oil.

And then he gives some nice data for the relationship of oil to GDP:

So, here's the point of agreement: yes, the economy undoubtedly creates more value in constant $$ GDP per barrel of oil than it did 30 years ago. However, there are two possible explanations, or contributions to the explanation, which Chairman Greenspan refers to above.

  1. The mix of goods and services in the economy is shifting to different things that do not require so much oil to create them per $$ of value .
  2. Oil is being used more efficiently to create any given mix of goods and services in the economy.
The difference is critical. If 1) were the main factor, then indeed oil shocks would hurt less - ok, it would be harder to produce the oil-heavy parts of the goods-and-service mix, but they are less important anyway and the oil-light part would be less impacted. However, if 2) were the important factor then oil shocks would be just as bad as they've always been. The fact that you use oil more efficiently throughout the economy than 30 years ago doesn't mean that losing 10% of the oil hurts any less as long as oil is still just as important to the goods and services required. If anything it might hurt more, since some of the low hanging fruit in efficiency gains have already been done, and it's a little harder to become more efficient again in response to the oil shock.

Now, Chairman Greenspan subtly suggests, without coming out and saying it, that 1) is probably more important. He does this by placing it first, prefacing it with "Much of" versus, "additionally, part of". Likewise, Econbrowser chooses to spend most of his space on anecdotes about factors of type 1), rather than factors of type 2), again suggesting the same thing. Especially when he generalizes from his examples and argues that is what explains the trend-line in his graph.

But is this really true?

So I argue that a pretty decent way to get at the question is to look at consumer spending. Firstly, consumer spending is 2/3 of the GDP anyway, so we've got the lion's share of what's going on.

Secondly, it is likely the case that some oil-intensive production has moved offshore and we now import those products to satisfy our consumer demands. While this may (possibly) make the oil-intensiveness of our production look a little better, it's not going to actually help us in an oil shock, since we will have to pay the hurting producers in Asia more, rather than paying the hurting producers in Milwaukee more, and the experience in the economy is not going to be that different.

But most importantly, it is consumer demand (expressed via their spending) that drives everything else in the economy. Producers are never doing things for the hell of it, but only in service of getting products and services to consumers. Eg a farmer buying fertilizer is not a consumer transaction. But the farmer wouldn't be buying any fertilizer if there weren't consumers anxious to eat his food, and in the aggregate, farmers will buy more or less fertilizer according to whether consumers want more-or-less fertilizer-intensive food. So the nature of consumer spending organizes the economy into sectors that are all just upstream ways of managing things to supply the consumers downstream. And the amount of money the producers in any sector have to spend on goodies from other producers will be pretty much proportional to what that sector gets from consumer spending. And so looking at consumer spending will give us a pretty decent idea of what goes on in the whole economy.

Now the Bureau of Labor Statistics, in order to figure out how to estimate the inflation rate, helpfully surveys what consumers spend money on. They revise these numbers regularly. So this lets us see what the economy is all about. I plotted the major categories in the current statistics, and also in 1986, which is the earliest year they have the data accessible on the Internet (I'd have preferred to look at 1975, but still twenty years ought to give us a decent idea of the general trend of things).

So that's the picture that I led the piece with, repeated here for the convenience of those of you with small screens:

Now, to me, the overwhelming first impression here is: stasis. What the consumer economy is about didn't change a whole lot. A little less food and beverage, a little more housing, a notch more transportation, less clothing (but it was small anyway), a tad more recreation. But really, the same things that were the mainstays of consumer spending twenty years ago are exactly the mainstays today and the relative importance has shifted only slightly.

Not only that, but the bulk of spending is going on three big categories: housing, transportation, and food and beverages. Between them, they account for 80% of consumer spending in both years I looked at. And they are all, well, sort of old-economy oil-intensive things. Housing in the CPI consists mostly of the cost of using the house itself, with smaller roughly equal amounts for the fuels/utilities to power it and the consumer durables that stock it. So this category is about large (and ever larger) piles of raw materials, mined, clear-cut, milled, machined, and transported great distances to be assembled into houses. The amount of high-tech nano-materials in the typical house is pretty miniscule. The service of housekeepers and gardeners barely shows up (presumably being buried in household operations: 0.707%). Insurance is down at 0.387%.

Likewise transportation. This consists almost entirely of private vehicles and the fuel for them (if you don't believe me, go check yourself). The only thing I would call a service component is a measly 1.3% on maintenance and repair.

And then food and beverages. The sustainability folks will already be foaming at the mouth about how the US agricultural system requires 10 fossil fuel calories to create 1 calorie of food. No, nothing oil-independent about that category.

So I claim that the amount of explanation 1) in this data is, to a decent approximation, zero. It is just not the case that the consumer economy has shifted to using less oil intensive things to any significant degree. Certainly, there is no way that this is an explanation for any substantial part of that factor of 2 change in going from 1.4 barrels of oil/$1000 dollars of GDP in 1970 to 0.7 barrels today shown in Econbrowser's picture. That must be coming almost entirely from improved efficiency - we like the same oil-intensive things, but we are creating more of the the stuff we like per unit of oil than we used to.

(There is of course a third possibility - that the constant dollars in his picture are not as constant as we might hope, but that's a subject for another day).

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! The effects of the hurricanes on the global oil supply are miniscule (0.3%-0.5%), and 2005 liquids production is almost certain to exceed 2004 production despite them. By contrast, past oil shocks involved real 7%-10% reductions in oil supply. However, if the current tightness persists, and if we then get some similar percentage point shock (say that Saudi revolution Governor Schweitzer is predicting), the economy will be no more proof now than it was in the 70s.

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.


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.

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.
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. 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.

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.
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!

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:

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.

Where exactly do you use oil in the manufacturing of jeans?

In a word, cotton. Trying planting, growing, fertilizing, spraying, harvesting, processing, and transporting cotton without using oil. Lots of oil.
There's oil in growing the raw materials, shipping it, dyes, chemicals, fertilizer, manufacturing it, and shipping the finished goods back to us, and trucking the damn stuff all over the place.

But I digress... I was simply using a metaphor.

The reality is that we have outsourced great gobs of manufacturing. Visit any west coast port and you'll see the enormity of the outsourcing. The growing non-petroleum trade deficit is a clear indicator.

In a sideways manner I think your comment validates my point - we've outsourced what we could. The sunk costs in chemical plants could not quickly be struck from the balance sheet and while oil prices were lower, there was no need to. But plant has been built elsewhere for years, and you will see closings, particularly in chemical plants that have a high reliance on NG.

Methanex among others are already on record as shutting down N.A. operations.

What we can't outsource?

Our consumers.

Manufacturing is a red herring. On the whole, manufacturers use very little oil, and when they do use oil, they use it at extremely high efficiencies.

Most of the oil the U.S. consumes is used to fuel private automobiles, and that isn't necessary to produce goods and services. If an employee lives 60 miles away from the Walmart where he works, is the gasoline he uses to commute to work everyday essential to supplying the service he provides? I don't think it is. He could move closer to his job, or bicycle, or ride a scooter, or take the bus, or carpool.

If you want to do a 1-to-1 match up between individual goods/services provided, and the oil which must be burnt to provide those services, it's illegitimate to include gasoline for commuting. Susan runs a hair salon, and walks to the shop. Since it is possible to provide hair styling services without using gasoline for commuting, gasoline for commuting should not be counted as energy used to provide hair styling services. If Lorraine also does hair styling, but lives 60 miles aways, her commuting gas shouldn't be counted as necessary to the services she provides. It should be counted as paying for an optional lifestyle choice -- perhaps under the category of leisure or entertainment.

I think this is a bit simplistic.  It's true that any individual could move closer to his/her job, but clearly everyone cannot move closer to their jobs without major changes in the housing stock (and it may come to that, but folks aren't going to opt lightly to subdivide the houses close to jobs while abandoning the ones far from jobs).  Even for one individual, generally the closer you go to major centers of employment, the more expensive it is to live there.  For example, where I live in the SF Bay Area, it is incredibly expensive to live close to the major employment centers.  So folks with moderate incomes must make a tradeoff between a small apartment close to work, or a larger place further away.  Different people make different choices.

Thus the easiest mode of change is to opt for more efficient transport (which people are now starting to do according to the car sales figures).

You're definitely right about the difficulty of change, but I think the bottom line remains: gasoline for commuting is not actually used anywhere in the process of producing the relevant goods/services. The raw fact is that hair styling can be done without using 4 or 5 gallons of gasoline a day. Gasoline plays no functional role in providing the service of hair styling. So why should we say that gasoline is needed to provide hair styling's portion of the GDP? That portion of gasoline should be struck from "oil used to produce goods/services" because, just as a matter of bald obvious fact, the gasoline is not being used for hairstyling. There's no physical connection between gasoline and hair styling. People were styling hair for thousands of years before gasoline was even discovered.

This means that oil intensity is greatly overstated because it includes large volumes of oil being consumed for purposes other than actually providing goods/services.

Say your furnace or telephone stops working, and you call for service.  The tech will probably drive a very inefficient truck to your house.  He's probably driving around all day to answer calls.  Suppose you have a sore tooth or strep throat.  You probably have to drive to the dentist's or doctor's office.

Without the gasoline or diesel, you'd have to hope that one of your close neighbors was a heating contractor, telephone lineman, dentist or doctor - all with home equipment.  You might get Aunt Mildred to style your hair, but accessing goods and services generally requires transportation.  

Maybe planning or high gasoline prices will induce people to redistribute essential services more locally.  Or maybe some will wait longer for services, do without or be more self-reliant.

More generally, suppose you just go out for a drive, and burn x amount of oil to do so.

What product/service was provided with that oil? None as far as I can see. It's just pure waste.

Probably a good 25% of the oil used in the U.S. falls under this same category. Ten mile long twice-daily traffic jams full of idling single passenger vehicles in every major city aren't producing any product/service. It's just waste.

Maybe a more penetrating approach is to total up all the oil which is being burned to produce no product/service at all.

when comparing the economic impact of the 70's oil shocks to now you are missing the most important difference. The impact of price controls.
Nicely written.

I smell a big fat red herring with this "ratio of oil to GDP" talk. We're being herded into the hallowed halls of econo-speak. You navigate through them marvelously.

I look at it this way: "Blood is such a low percentage of body mass. The body is so efficient at using the blood it has that we have nothing to worry about if the supply decreases."

The denial is so deep, and I dread the outcome of peak oil--a simple natural phenomenon--will be each person for him/herself.

I find this oil/gdp also very strange. Should we be cheering because we have managed to make more and more rubbish (or rubbish-to-be) like TVs, computers, 3-ply soft asswipes, cars the size of a house etc. from less amount of oil? And still we're consuming more and more oil all the time, mainly because we're producing more and more food with the oil-burning farming industry, and thus growing more and more consumers on this planet.

Same strange thing in calculating energy efficiency of ethanol, if we counted the energy spent by building all the factories needed to fuel all cars in the world, the energy spent by builders of the factory driving their cars to the site, the enegy they spend with the salary they get etc., it would leave minimal amount per ethanol gallon, so that "the final result would add very little to the total energy value of a gallon of ethanol", like it says here So the secondary energy inputs are neglible. Means that if we produced enough ethanol, we could transform for example all the rainforests in south-america into cornfields, since it's only secondary energy input and it gives more GDP, and it wouldn't show in the price of ethanol. And that's what we'll most certainly do.

"We conclude that the NEV of corn ethanol is positive when fertilizers are produced by modern processing plants, corn is converted in modern ethanol facilities, farmers achieve normal corn yields, and energy credits are allocated to coproducts. Our NEV estimate of 16,193 Btu/gal can be considered conservative, since it was derived using the replacement method for valuing coproducts, and it does not include energy credits for plants that sell carbon dioxide. Corn ethanol is energy efficient, as indicated by an energy ratio of 1.24, that is, for every Btu dedicated to producing ethanol, there is a 24-percent energy gain. Moreover, producing ethanol from domestic corn stocks achieves a net gain in a more desirable form of energy. Ethanol production utilizes abundant domestic energy supplies of coal and natural gas to convert corn into a premium liquid fuel that can replace petroleum "imports by a factor of 7 to 1."

From your link above.  Apparently the best EROEI they can come up with is 1.24 to 1.  Furthermore they are crowing about the use of "abundant domestic energy supplies of coal and natural gas."  A quick look at the numbers shows that 90 percent of that figure is in natural gas.

The damning figure is 1.24 to 1.  This is pathetic since the  main result is to turn oil, coal and methane into approximately the same amount of alcohol.

Rainforests to cornfields is a great idea. We'll get less oxygen, more C02, and the reduction in biodiversity will rid us of all sorts of pesky insects. At the moment, burning off the rainforests is producing wasted energy and southern hemisphere pollution. With this plan, we can run the distilleries by burning the trees from the forest, and then spread the C02 across 2 hemispheres--wood C02 in the south, ethanol C02 in the north. And all at an affordable price. How cool is that?
"Blood is such a low percentage of body mass. The body is so efficient at using the blood it has that we have nothing to worry about if the supply decreases."
or you're getting fatter! :)

I heard this argument so many times, again this morning on CNBC, an economist was touting that the economy was fine because of the low ratio energy/GDP. A lower energy/GDP since the 70s is more a consequence of the transition to a primarly service based economy from a manufacturian based economy. For instance, Is the energy/GDP a good indicator of our lifestyle? nope, have a look at the energy/capita and its growing because our lifestyle is more energy demanding, period. There are so many economic indicators out there that you can used and abused!

As a physics major, how can you let "them" mix a real physical measurement (energy) with a completely bogus number (GDP)?

Yes, I have attended many brainwashing sessions where an economics "professor" exalted about how GDP (Gross Domestic Product) is a valid measure of all "goods" and "services" exchanged within the USA.

In my mind, it's all:
(I sound like Krazy Kunstler now, don't I?)

When a cigarette company sells me a pack of cancer sticks, is that a selling of "Goods" or a selling of "Bads"?

And if it is a "Bad" instead of real set of "Goods", should it not be minused from the GDP total rather than added?

When I pull up to the full-service aisle of my gas station and the attendent pumps more crude distillate in for me to burn and pollute the atmosphere, is he doing me (us) a "Service" or a "DISservice"?

And if it is a "Dis-service" instead of real "service", should it not be minused from the GDP total rather than added?

How can GDP be a valid "number" when the econo-babble babblers refuse to acknowledge that there are "Bads" and "Disservices" in this world. It is not just all "Goods" and "Services".

Truth is that "they" who worship valuation of all things do not want to have their own BS evaluated for what it really is.

Energy divided by some phony GDP number? Give me a break.

P.S. I am not the only Krazy Kunstler to have weird thoughts like this:

This failure to discriminate means that the Gross Domestic Product - the monetary value of a nation's annual output - is a mixture of goods and bads, of costs and benefits. For example, GDP includes the value of the work generated by dealing with traffic accidents and cleaning up oil spills, and by other similar mishaps produced by the way the economic system operates. As a result, a rise in GDP these days gives very little indication whether the welfare of the population which produced it is rising as well. Indeed, researchers who have corrected GDP figures to eliminate the bads they contain have shown that on a sustainable basis, the growth process in some industrialised countries is actually making the majority of their populations worse off.


More reading sources: ods+and+bads%22&hl=en -indicators.pdf+GDP+%22goods+and+bads%22&hl=en

mikeB spots the code-red herring:
We're being herded into the hallowed halls of econo-speak.

mikeB you get a Merit Badge for being on the look out and pointing out the econo-spotted hoot owl to the half-asleep hikers on this Peak Oil exploration trek!!!

Look around.
The traps are everywhere.

The "price signal" is a human-fabricated piece of nonsense noise.

That noise does not change the amount of liquid hydrocarbon that we humans will be able to easily deplete (not "produce", that's more econo-babble) from Mother Nature's generous geological-traps for use in burning it and thereby destroying the planet (note I did not say "consume" --yet more econo-babble).

Some will surely protest here that the hallowed,  "price signal" is a product of reasoned discourse among millions of humans and therefore the law of large numbers (as applied in insane asylums) makes it a valid number rather than a fictitiously fabricated number (one pulled out of a hat).

Not so. The "price signal" (human-made noise) is a result of a series of conversations we "rational" human beings have been having with ourselves for many years. It is no more valid than a conclusion reached by inmates of an insane asylum after having had conversations with each other over the course of years.

We have rationally convinced ourselves to build suburbs with 1000's of miles of asphalt roadways. We have rationally convinced ourselves to invest the bulk of our limited resources into the building of automoibile manufacturing plants. We have rationally convinced ourselves that driving aimlessly about the suburbs with our animal-friend "Jaguars" (or "Barracuda's", "Cougar's", "Mustang's"), with all their pent-up "horse powers" because that makes us smart and powerful --as well as sexy, of course.

Finally our conversations with ourselves have convinced us that $60/bbl of crude and $3.xx/gallon of distillate is a "fair" price relative to what we pay for other "goods" (more eco-babble, are you sure that McD is "good" for you?) and "services" (more eco-babble).

Thank you mikeB for pointing your eagle-eyed finger at the econo-spotted hoot owl.

An interesting aside: animal names for our pet cars:

Thanks, dude. Sometimes I feel economists are out to make us all feel stupid. Things can't be as arcane as they'd like us to believe.

Similarly for all the modeling and structural questions about oil fields, as if no one who is not an expert can make an informed decision.

I like this site 'cause occasionally someone puts things in a form simple enough for us dullards to chew on.

I like this site 'cause occasionally someone puts things in a form simple enough for us dullards to chew on.

Speaking of something to chew on, I notice that many sites try to make the whole Peak Oil thing super complicated. They have charts and curves and equations ... Well you know what I mean.

At a very basic level, PO is somehting that every grade school kid can understand.

I put up a simple grade-school level post at my site:

As for "economist-babble", it is Alan Greenspan's JOB to talk in RIDDLES.

The President of the USA would not have hired Greenspin if the man was the kind who gets up in front of crowd and says:

"My dear simple folk, let me put it in simple terms: We're F***ED.

We owe the Chinese so much money, we'll never be able to pay them back. Ha ha ha. This is especially true because we don't have any factories left in this country. We are no longer a nation of "producers". We are pure "consumers". It is basic economics 101 that you need to "produce" at least as much as you "consume" in order to stay "in balance".

And if you want accumulation of "wealth", you must "produce" more than you "consume". You must save your excess production and invest it wisely in creating new forms of value production.

Now here in America, we don't do that. We claim we are the smartest guys on the globe; "Yankee ingenuity" you know. We "outsource" everything. Why I would outsource my mother if she were still alive. Ha HA HA.  --oops, I forgot, the President told me to speak only in riddles.

Let me therefore rephrase what I just said: Expectations are meeting with excessive headwinds in global productivity evaluations pursuant to fundamental bullshit bullshit riddle-word riddle-word blah blah blah ...

My view on this whole business is that the "efficiency" gained in terms of oil has all been thrown onto either natural gas and (to a much lesser extent) nuclear.  During the 1970's, the US consumed something north of 1 mbbl/d of oil to generate electricity; now that's virtually zero.  Additionally, many homes have been shifted from oil to natural gas over the past 30 years for space heating.  My guess is that if we were to plot energy use per dollar of GDP, it would be more or less constant, in keeping with Stuart's contention.
Well, first of all hello to everybody from Spain. This is my first post after a couple of months reading the blog daily. I really enjoy the high quality of discussion here. Specially Stuart´s posts, which tends to touch the topics that I find most interesting.

Well Kyle, I was thinking the exact same thing as you and I was about to write a similar comment. From the iea world energy statistics 2005 (page 6) you see that in 1973 and in terms of primary  energy the world was dependent

45% in oil, 16.2% in Natural Gas and 1% in Nuclear. In 2004

34.4% oil, 21.2% Natural Gas and 6.5% Nuclear.

The rest remains more or less the same. For Coal at around 24.5% and combustible renewables and waste at 11% and finally Other at less than 1%.

A graph plotting energy/GDP for the US (Figure 3) is very similar than the one of oil/GDP.

In the global picture, things remain the same.

But in Spain energy/GDP (page 26) has been going up in the last 25 years slightly (more than 4% in 25 years).

Roberto, interesting post. I looked at the EIA data on energy consumption and found that, during the last 55 years (1949-2004), while the energy intensity (total energy per dollar of GDP) was cut by half, industrial energy intensity was reduced to a third. Industrial consumption was almost half the total and is now just a third.

It is also interesting to note that, according to the transportation data, the SUV's of today are much more efficient than the barge-like automobiles of the sixties and early seventies (in 1973, average fuel rate for passenger cars was 13.4 mpg, against 17.7 mpg for vans, pickups and SUV's in 2003). As transportation is almost a third of total energy consumption (and a much larger part of oil consumption), the argument of increased efficiency is, at least in part, justified.

Other than that, looking at the GDP data the USA went from the condition of net positive exporter of goods (2% of GDP) to that of a negative exporter (5.7% of GDP) in the same period. Although a more detailed analysis is needed to confirm Stuart's suspicions, it seems fair to assume that a significant part of the reduction in energy intensity is due to deindustrialization of the country.

A lower exergy/GDP is misleading because the exergy/capita has been increasing the past decades. There is a good study by Ayres and Warr:

"Is the US Economy Dematerializing? main indicators and drivers" in The Economics of Industrial Ecology: Mehtods and Applications, MIT Press 2004.

Have a look for instance on the Figure 21 p 43.

In the case of fossil fuels, significant gains in thermodynamic (as opposed to economic) efficiency on the production and processing side are largely confined to petroleum refining, as indicated by Figure 9, which plots the historical trends in crude oil cracking and refining technology. The net result has been increased utilization of crude oil for purposes of propulsion vs. declining usage for other purposes such as illumination (kerosine lamps), cooking and space heating, Uses for lubrication and petrochemicals have also increased, although they are not plotted in the graph. Per capita fuel usage is also affected by efficiency gains in energy services (work) performed, including steam engines and turbines (for electricity production), internal combustion engines for vehicular propulsion and heat utilization (Figure 10). Nevertheless, despite efficiency gains, per capita fossil fuel consumption in mass terms has more than doubled since 1900 (see Figure 21, right scale).
Trends in mass/GDP and exergy/GDP diverge significantly from trends in mass/capita and exergy/capita. The per GDP trends tend to exhibit declines (albeit with some exceptions for specific materials during certain periods), but most of the per capital trends show increases, (again, with a few limited exceptions) as shown in Figures 21-24 and summarized in Figure 25. This reflects the fact that GDP has increased faster than mass (or exergy) consumption. This follows, in turn, from the overall shift from products to services in the economy.
For some reason my browser couldn't find your CPI graph located here:

Right, I'm using Firefox and I didn't see it either. I don't think its kosher to have an IMG tag which is a PDF file and expect that to display inline. Maybe the admins could take a screen shot of the PDF display or otherwise turn it into a regular GIF or JPEG file and replace the link with that.
I couldn't see it either.  What I do with pdf files is activate the camera icon from within the Acrobat Reader, surround the graphic that I want from the pdf with the box that the camera icon activates, open a Powerpoint file, paste the captured picture into a Powerpoint slide, save the Powerpoint file as html, then extract the gif file for the graphic from the collection of junk that this creates.  There are doubtless better ways to do this but that one works without any special software.
My apologies guys that I didn't pick up on these comments sooner.  The .pdf was an experiment that looked way better in Safari than GIFs.  I've gone back to GIFs and have replaced these.
Housing in the CPI consists mostly of the cost of using the house itself, with smaller roughly equal amounts for the fuels/utilities to power it and the consumer durables that stock it. So this category is about large (and ever larger) piles of raw materials, mined, clear-cut, milled, machined, and transported great distances to be assembled into houses.

In the CPI stats, under housing, we find this item:

 Rent 6%

 Why does it require oil to rent? I used to rent a house built in 1929, and nobody had to use any oil for that to occur. You can't count the oil used to transport boards in 1929 as part of oil dependence 2004. In 2004 the rental is a pure service, which you pay the owner for. The owner then pays the people who financed the house, and most of that is interest (another service). In 2004 no oil is being used in the construction of the house, and the house is simply a nexus of various services.

Yes the costs of individual houses are sunk, but we are amortizing the total over time.  Housing construction as a whole is not showing an overall decreasing trend.
Oil intensity isn't amortized. It is a straight comparison of oil burnt in a certain year vs. goods and services produced in that year. If diesel is burnt transporting boards to a housing site in 1929, that falls under oil intensity in 1929. You can't include that same diesel as "rent" in later years. That would be double counting.
Your concentration on consumer spending is a bit misleading.
In 2004 the USA balance of goods and services is 1.5 trillion of imports and 0.8 trillion of exports. So 700 billion of this consumer spendigs are on imported goods which do not account in the GDP. This is for me the explanation why USA economy did not suffer much from the energy shock, while there is a noticable slowdown in Europe and East Asia.

This taken into account could explain the obvious discrepancy betwee consumer spending and GDP figures. According to
CIA World Factbook USA GDP has the following structure:

agriculture: 0.9%
industry: 19.7%
services: 79.4% (2004 est.)

Now the service sector is not that energy intensive and is the main source of GDP growth in recent years. Much of it are "financial services" and other corp-to-corp services which are not directly reflected in consumer spendings, but are simply passed on in the price of the end product (consider selling a toothpaste for instance - what part of the end price of the product are materials and labor, and what part are design, packaging, transportation, advertising and so on and so on). To my mind USA buisnesses are much more specialized and this leads to outsorcing lots of production steps as "external services". This further pumps up the service sector - and thus that bogus indicator "GDP".

One could ask, could our 80% service economy exist without this 20% in industry and agriculture? My guess is sure NO. My guess is also that without physical shortages the status quo can continue for quite a while. The "energy-efficient" USA economy will continue to "grow", while the "energy-unefficient" economies of China and Europe will suffer.
Until the balloon called "USA economy for-ever" pops.

At least in the case of European economies, they tend to use about half the energy per capita to generate per capita GDP that is roughly equal to or slightly less than that of the US.  Thus, their economies are much more energy efficient than that of the US.  
could our 80% service economy exist without this 20% in industry and agriculture?

I too think that the answer is "no".  To the nice "blood" analogy in another comment on this page, I'd add: can we survive without the agricultural sector alone, which is less than 1% of the GDP according to the CIA factbook?

In econo-speak, it's all about money.  But in the biophysics of things, the move towards "more wealth" per unit of energy means only that we are more dependent on energy.  That is because that shift only means that we have employed yet more "energy slaves" to further amplify our basic solar-powered existence.  It is the incredible utility of fossil fuels in the hands of the few farmers that allows the vast majority of us to spend our time doing something other than farming, thus contributing to the "GDP" in (sometimes) less energy-intensive ways.  That extra GDP reflects surplus food.

And, as Herman Daly emphasizes, a lot of our "economic activity", measured as a positive in the "GDP",  actually comprises of "negatives", i.e., activities that only mitigate the harmful effects (such as pollution) of other activities.  E.g., think about the ever-growing health services sector.

A comment on the importance of "outsourcing" the USA's manufacturing to the reduction of its domestic energy usage (per GDP, not per capita).  Stuart said it's only 5% of the GDP.  But the direct energy use is also only a small percent of the GDP.  The numbers in another comment on this page show that roughly four times as much is spent on imported non-petroleum goods than on petroleum.  Since about two thirds of our total petroleum use is imported, that means that imported goods represent an enormous amount of embedded energy, possibly greater than our total direct petroleum usage.  There goes the supposed doubling of our energy efficiency!

Well I'm sure there is some improvement of efficiency, but I strongly object frivoleus usage of aggregate statistical data. Meant to show that, you see we don't have a problem because our 2 PDAs cost more than that gallon of water... Yeah great, but if we get to the desert we're headed to, which one will be the more valuable? The market is completely shortsighted about this issue - it values a resource or commodity just based on the current or on a certain future supply/demand ratio. Unless you put a crystal ball in front of everyone dealer's desk you can not get a "perfect" market. That's why our religion will fail us unless we abandon it while there is still time.
You have to look at the definition what they are calling a "service".  In the CPI aggregations, housing is a service.  Ie, they are very likely referring to things as services that involve very big piles of matter and energy.  It's an illusion that "services", thus defined, are dematerial.
Service is an economic activity consumed on the place of production - it can not be stored or reused after it's been achieved. The rent and mortage part of housing in CPI is not a service in GDP because you pay for house that has been produced much before that. The utilities (repairs, maintenance) are services in GDP, and the house improvements are goods (but these goods may be important).

The problem with services is that they can be easily be inflated. I may for instance price and include the services of my wife in the GDP and I will get a pretty good GDP growth :) The other problem is that most of them are hard to trade internationally so it turns out that services in high income countries are much more expensive than services in lower income thus producing higher "service" growth in developed than developing economies.

I object that you compare different types of economic indicators. Consumer spending is one, but the added value measured by GDP is another. In this sense building a house contrubutes to GDP, but renting / paying for it is not producing anything - it is just part of the consumer spending. The consumer spending relate to GDP just through personal income - GDP defined through the income method is the folowing:

GDP = Y + S + E - I

where Y is end consumer and government spending;
S is net savings (saving - loans)
E is exports
I is imports

The logic is that the total added value produced in an economy is either spent or saved. You can spend more but this reflects your trade balance (E - I)

On housing as a service.  I agree with you that it doesn't make a lot of sense, but this is quite clearly included in what the BLS considers a service.  Look at page 2 of Table 1 in here.   Services is 59.761%, but "Rent of shelter" makes up 32.3% percentage points in this, as clearly indicated by the fact that "Services less rent of shelter" is 27.46% of spending.  (Note that "Rent of shelter" here includes "Owner's equivalent rent" - the way BLS accounts for homeowners spending to own their homes.)  That's not the only thing that makes no sense to me to call a service.  "Gas (piped) and electricity" is quite clearly being counted under services.  Also, of the 17.41% of spending going on transportation (page 1), 6.235% (percentage points) is counted as "Transportation Services"  on page 2.  But there's no way to get to that number unless gasoline is being counted as a "Service".

In short, "Services" as used by the BLS has almost no relationship to the ordinary meaning of the term and the fact that in BLS-speak services are 60% of consumer spending certainly should not be taken to imply that most of the economy is ephemeral intangible things, rather than big heavy flows of energy and matter.

You are correct that I'm neglecting the trade imbalance in non-fuels.  But it's only 5% of the economy, so for my purposes it doesn't profoundly change the answer - we have a factor of two change in oil to GDP to explain, so the odd 5% here or there isn't going to make a big difference in covering that factor of 2.

As I am an engineer rather than an economist, perhaps I am off base, but I have a growing suspicion that there are some serious fundamental flaws in the way that price indices, such as the CPI, are used to reassure people that the 'real' price of things is not going up.  As I understand it, the CPI is a 'basket' of various goods and services that consumers consume and that the various components that make of the CPI are weighted with arbitrary factors in an attempt to capture the relative contribution of each component. I also recognize that the CPI is supposed to enable one to get a picture of the true cost of something when one compares prices in the present vs the past. OK, so far so good.

However,I think the fallacy rears its head when some economist uses the phrase, "Adjusted for inflation the real price of [insert whatever commodity you like: gas, houses, cars, etc] has not risen since 19-whatever. Well, if the inflation rate is based on some index consisting of a basket full of commodities, then isn't there something just a bit circular in using that same index to compare the price of something  already included in that index?

To use a simplistic example, say we create a price index consisting of only three items: gasoline, bread, and beer. To keep it simple, we shall weight them equally.  Now let us say that gasoline, bread, and beer each increase in price by 100% over the last year. Even so, an economist can legitimately make the statement that adjusted for inflation gasoline is no more expensive than it was a year ago.

 But the index is self-referential and sort of loops back on itself.  Thus, even if the prices went up 1,000-fold (such as in Germany during the 1920s), the economist could still make the exact same statement, and technically it would be true. So, it would appear to me that using an index in this manner is self delusional at best and deliberately misleading at worst.  Of course I fully realize that inflation indices are far more sophisticated, but I wonder if they are fully  showing what's going on regarding 'real' prices as they affect real consumers.  

Try this: Compare the CPI for 2004 vs 1974.  Then compare the following, 2004 vs 1974: a full-size car, a new house, furniture. Does the 2004/1974 ratio of these items even come close to the 2004/1974 CPI ratio?  If not, why not?

Any economists out there willing to straighten me out on this point? If I am totally off on this one, I'd sure like to know why.

I have a growing suspicion that there are some serious fundamental flaws in the way that price indices, such as the CPI, are used to reassure people that the 'real' price of things is not going up.

Woah dude.
Don't get scared.
You must have accidentally swallowed a red pill and awoken from your slumber within the "Matrix".

Things can get really ugly here if you continue to question and "think".

Maybe you want to take a blue pill and go back to sleep.

On the other hand, if you want to "think" about this noise emmanation that we humans refer to as the "price signal", you might want to step into my rants at:

Warning, this could upset you whole evaluation about what we human creatures should value as we go about "pricing" various "goods" and "services".

Danger young Robinson. Danger. Go back to the safe coccoon of the Lost In Space space craft. Danger.

If you look at the house construction component of house costs only, it is comparable. An equally good insulated, same size, same number of bathrooms house built in 1974 and 2005 costs only about the CPI change. The difference in the price you note has to do with tax policy and the consequent zoning regulations to make sure that poor people (people with children, really), do not move into your school district.
Oh really?  We bought our house in 1979 for $57,000.  A comparable house up the block recently sold for $325,000.  That is a ratio of 5.7.  I don't think the ratio of 2005/1979 CPI is anywhere close to 5.7.  There are many other examples.

Am I being paranoid in suspecting that the CPI is a deliberate low-ball?

No, you are not paranoid. The CPI is deliberately lowballed so things don't look so bad.
As for the price of your house, there are so many variables that it's not a valid indicator. The website I referenced earlier has conclusions drawn from data of tens of thousands of houses like yours.
Joule, the statement "adjusted for inflation, oil is no more expensive" is exactly true in your example.  You don't have to give up any more bread or any more beer than you used to in order to get a given amount of oil.  If I'm a beermaker, it's no easier and it's no harder than it used to be for me to get a barrel of oil-- I put in whatever hours it's always taken me to make the beer, and I trade the beer for oil at the same rate I always did.  What's happened in your example is not that oil has become more expensive in terms of beer, but rather that a dollar buys less of everything-- less oil, less beer, less bread.  There has certainly been inflation (a reduction in the value of a dollar), and that is what the CPI correctly measures (CPI has gone up in your example)  But oil is no more expensive than it used to be, relative to beer or bread.
James Hamilton -

Thanks for the comment re the use of the CPI.  

As you correctly pointed out, if the price of one of the componets of the CPI rises no more than the CPI itself, then one can legitimately make the statement that, "Adjusted for inflation, commodity X has not risen in price."

Maybe I've been reading more into it that what is really there, but I still get the feeling that the subject of inflation is often discussed in misleading ways.

When one gets right down to it, the thing that is of direct interest to the consumer is his net income in relation to the CPI, for obviously it doesn't matter what the inflation rate is if one's net (after-tax) income has risen accordingly.


My understanding is that the CPI does NOT include FOOD or FUEL.

That makes it useless, no?

CPI-U does include fuel and food.  There is a "core CPI" which excluded food and fuel because they are volatile and mess up people's graphs.  It is becoming popular, but I'm a bit suspicious of that.  Food and fuel are volatile because they are inelastic - ie people really want/need them - so it seems particularly dangerous to exclude them.

Perhaps we are simply exporting our energy use per unit GDP by outsourcing.  But set that aside for a moment.

If we examine the consequence of an apparently 2X higher GDP/energy ratio, one consequence we get is that the amount of demand destruction required to balance any supply shortfall is doubled.  This is a depressing conclusion. It implies we are now more vulnerable than before to a greater decrease in our standard of living due to dimiishing oil supplies.

To me, it resembles a negative feedback mechanism of sorts that will amplify the effects of the next oil shock, compared to the last one.  In terms of the reduction of economic activity, will be worse.  Why is Greenspan so proud of this number?


Meant positive feedback.

Re: "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!"

Absolutely right. We haven't experienced any oil shocks yet that are even remotely comparable to the 1970's and early 80's. Let's define an oil shock as a mininum 5% supply reduction. If that happens, we'll find out just how resilient our economy truly is. Given our transportation sector demands and how inelastic they appear to be, combined with the failure to implement efficiency (CAFE mpg) in this area since the 80's, I'll wager that our current "perceived" invulnerability is highly overrated.
I have been trying to get my head around why the oil prices have fallen from the $70+ high and have been bouncing around in the $60s since the first big buildup. I think this comment by Dave answers the question. The price of gasoline and other end products certainly has risen, but the supply has remained thanks to SPR draw down and additional supplies from European stocks. It was mentioned here that US crude and gasoline stocks are rising
Prices slumped after weekly U.S. government data showed crude stocks rising by 5.6 million barrels, sharply up on a forecast build of 2 million barrels. The build brings U.S. crude supplies nearly 12 percent above last year after hurricanes Rita and Katrina toppled refineries on the Gulf Coast and slashed demand for the feedstock. Gasoline supplies, meanwhile, rose by nearly 3 million barrels against expectations of a 1.2 million barrel draw, though distillates, which include heating oil, declined by 1.9 million barrels -- nearly matching expectations.
So clearly there is not a supply problem, and the higher end product prices are reducing demand in where the customer can painlessly reduce their usage, i.e. grouping trips to the supermarket into one trip.
There may be some efficiency gains. The average house in the 1970s had minimal insulation, a 1950s-era furnace with its efficiency, and single-pane windows. After the energy shocks, you have greater insulation, a move to more efficient heating and cooling designs, and double-paned windows.

Of course, you also have home designs that don't take advantage of the outside environment and require energy inputs all year 'round. : -(

I wonder if a better metric would be "amount of time you would have to work at the median income in order to purchase X" for some of these comparisons? You still lose the improvements in quality, but for general items (such as "how long did I work this month to heat my house?") it would have a good cross-temporal application.

One of the biggest issue I have with such comparisons is the use of hedonic adjustments to "fix" inflation for improvements in quality.

How exactly do you compare the housing of 1970 with the housing of 2005?  Certainly houses are bigger now and more expensive, so in terms of absolute GDP they are much more valuable.  We could be spending exactly as much energy for our housing as we did in 1970 but because of the larger, better houses it would look like the energy intensity of housing has decreased while on a percapita basis the energy intensity of housing has remained the same.

I think KWh/person is a better energy intensity measure than KWh/$GDP and in that respect we have seen very little improvement.

I agree. Per capita energy use is a better metric because it tells us how we spent our efficiency dividend. By and large, we've wasted it on bigger houses, SUVs, and urban sprawl.

Yes, houses have more insulation and they're more airtight and have more efficient heating and cooling systems. But people who used to buy 1200 square foot houses now buy 3000 square feet, so you've got more embodied energy in the house with all the extra materials and you have to put as much or more energy into the house for heating and cooling it and powering the lights and appliances.

Whereas energy/$GDP has gone down in the past 30 years, EIA data show that energy/person (US) has stayed roughly the same. It dropped in '74-75 and again from '80 to '83 and had been slowly rising until 2001, when it took another little drop.

I think the real issue here is that it's how energy shocks will affect people because our actions are responsible for every dollar of GDP.

Great topic.
In trying to see if we are more or less vulnerable to the shock most readers think is coming, it would be good to compare the potential for reductions in oil usage today vs. reductions that were taken over the decade from 1972. Back then we switched from oil burning electric power generating power plants to coal and nuclear (and, much later, to ng), switched (to some extent) from oil to ng feedstocks for chemicals and fertilizers, increased the efficiency of cars and trucks and, (temporarily) car-pooled.

WHile there is significant potential to move towards European level efficiency, particularly in cars, many of the above items have already been done, so are not available to help us become more oil efficient today. If in fact we are limited to transport, and cars in particular, it seems we must obtain substantially greater reductions in this sector than was obtained in the prior period (unless a switch from a typical SUV to a Prius results in substantially greater efficiency than equivalent changes in the seventies). If this is true, gasoline prices would have to climb much higher over a shorter period to achieve a similar amount of demand destruction. Such a scenario might be good for Toyota but not so good for domestics, as usual looking ahead from the ostrich position.

I'd just like to throw another thought into the swirling mix.

Since the 1980s most people have increased the number of hours that they work.  It is now the 'norm' to work 60, 70 or 80 hours a week.

However, someone who works longer hours does not consume much more energy in comparison to if they were at home instead.  They still eat the same meals, they still have to travel to and from work, etc.  In fact the only real 'loss' associated with longer working hours is that of personal leisure time.

All the extra productivity gained by those longer hours could have helped the GDP to rise relative to energy use (instead of energy decreasing against GDP).

IMHO, the massive drop in energy use from 1978 (1.4) to 1983 (1.0) is most likely 'low-hanging fruit' energy efficiency gains.  Undoubtedly, we were more wasteful of energy/oil before the 70s shocks than we are now. Indeed, this graph from EIA shows that the areas that had the biggest drops in oil use in the 80s were Industrial, Residential and Electricity Generation.  Transport took only a mild hit and recovered again into it's steady rise.

Those five years are too short to attribute this drop to the movement of production off-shore, which I would say really took-off in the late 80s and 90s.

Most of the extra hours worked are from the middle classes sending their wives to work, in second cars, in office buildings with air conditioning, etc. More energy, more GDP, etc.
Lower class women always worked and upper class women are statistically unimportant because there are so few of them.
While we're debating these abstract scenarios about whether the economy is immune to oil shocks, I thought I would post some real news.

From the NY Times, Senate Fails to Raise Minimum Wage.
Senate proposals to raise the minimum wage were rejected Wednesday, making it unlikely that the lowest allowable wage, $5.15 an hour since 1997, will rise in the foreseeable future.

A labor-backed measure by Sen. Edward Kennedy would have raised the minimum to $6.25 over an 18-month period....

Kennedy, D-Mass., said Hurricane Katrina demonstrated the depth of poverty in the country and he pointed out that a single parent with two children working a minimum wage earns $10,700 a year, $4,500 below the poverty line.

He said it was "absolutely unconscionable" that in the same period that Congress has denied a minimum wage increase, lawmakers have voted themselves seven pay raises worth $28,000....
Perhaps some of our economist friends will explain how this makes sense and is in the best interest of everyone, even the poor whose minimum wages have not been raised in 8 years. I know you economists out there can rationalize almost anything and it would be great to hear how you explain this one away. Looking forward to it....
I know you economists out there can rationalize almost anything and it would be great to hear how you explain this one away. Looking forward to it....

The silence is deafening ...

The silence is deafening ...

But then again, it is clear you do not understand:


There are at least two (2) classes of people in society.
They go by many names.
Let's call them the "HAVES" and the "NEVER-WILLS".

The "HAVES" do not do any hard hard work.
The "NEVER-WILLS" do back-breaking manual labor.

The "HAVES" intend to (want to) pay close to $000 per hour to the "NEVER-WILLS" for all the back-breaking manual labor the "NEVER-WILLS" perform. This is known as "free" market economics because the "NEVER-WILLS" are working basically for "free".

On the other hand, when the "HAVES" lift their Paris Hilton fingernails and do even an ounce of "work" (oh dear me) they expect to be paid $1000 per minute for the hard hard lifting they contribute to society.

This is reason the "HAVES" have, and
those wretched "NEVER-WILLS" ... well, never will.

Now dear boy; anybody like you who is proposing to actually "pay" (cough cough) the "NEVER-WILLS" for their labors clearly does not understand "free markets".

More reading:

The US has been importing people, especially lower paid, unskilled, nonenglish speaking people, and using these immigrants to simultaneously lower wages and increase rents.
I think of immigrants and imports (which contain imported labor, mostly low paid) as just another tax on poor people, like zoning regulations, college degree requirements for unskilled "good" jobs, etc.
If you think of immigrants and imports and zoning as taxes you can think of poor people as paying 80% income taxes.
None of this is relevant to the peak oil problem in America except as insofar as importing forty million people, and their children, some posting on this website, increases energy consumption in America.
We've seen the energy us per dollar GDP index before.  But, a more instructive graph, for me anyway, is to plot that, and energy use per capita, and US population since 1970.  To be sure there has been a modest increase in energy use per capita (the line looks mostly flat to me).  But, we've enjoyed continued growth in population (kinda like getting fatter...).  Seems to me, we've plowed any increased efficiency in energy use in the economy into more friends for the nation, while not achieving any appreciable gains in energy use per capita -- (though I suspect we use more thingies, that use less energy with a zero sum in terms of overall energy use per capita).

So, unless we can achieve reduced energy use per capita, and -- or -- reductions in population -- increased energy intensity doesn't really matter now does it.

Here's the raw data should someone like to post the graph for the group.

    Per dollar    Per capita    Poplation Growth
1970    1    1    1
    0.988105    1.00389    1.012721167
    0.9846784    1.041006    1.02362251
    0.9695088    1.073385    1.033438387
    0.9523188    1.039279    1.042924461
    0.9284898    1.001335    1.053259738
    0.9306579    1.046957    1.063315544
    0.9128523    1.063587    1.074065301
    0.8867328    1.079211    1.085502
    0.8694356    1.079565    1.097552309
1980    0.8432513    1.03556    1.108131051
    0.8020764    0.9969531    1.119060137
    0.7848113    0.9475369    1.129782989
    0.7493152    0.936958    1.140158573
    0.7338402    0.9750761    1.150072674
    0.7022828    0.9631115    1.160308571
    0.6815254    0.9581554    1.171081888
    0.6802459    0.9798518    1.181596436
    0.6830879    1.015348    1.192374493
    0.6765552    1.03145    1.203689896
1990    0.6618263    1.019796    1.216464606
    0.6623778    1.002048    1.22957683
    0.6513162    1.004053    1.243559198
    0.6463838    1.009684    1.256978153
    0.6332578    1.016402    1.269380528
    0.6314475    1.026574    1.281454095
    0.6289554    1.048095    1.293279602
    0.6051024    1.041127    1.305733998
    0.5834183    1.033573    1.318193895
    0.5681225    1.039251    1.329860629
    0.5601273    1.053143    1.376126614
    0.5430738    1.013025    1.390347673
    0.5405051    1.020042    1.40439342
2003    0.5248231    1.011429    1.41822333

I checked some numbers concerning the energy effect of the US exports and imports (CIA Factbook, 2004)

The share of industry in the US GDP is 19.7% or $2314 billions. Total imports were $1476 billions or 65% of the industrial production. Almost all of this consists of industrial products (acgricultural imports were only 5%). Oil is included because it belongs also in the US industry. The deficit was $647 billions or 28% of the US industrial production. This is a very coarse estimate but nevertheless it is easy to see that imports are a very important factor in the US energy consumption. In many ways these goods make the basis of the economy: they are sold, marketed, transported, stored, maintained - they create a big part of the service sector.

How much energy is involved here? In 1997 industry used 38% of total energy in the US. So BP statistics gives about 890 Mtoe a year. 28% of this is 250 Mtoe. This makes 11% of the total US energy consumption. This much - about 10% -  is added to the energy balance by the trade deficit. Here we assumed that the energy intensity of imports is the same as in domestic goods. This may not be so.

The US imports energy intensity is on the basis of above estimates about 0.5 Mtoe / billion dollars. It is very difficult to estimate for instance the energy intensity of Chinese exports. It seems that it may be about the same as in the US.

There are several reasons why the energy intensity has statistically decreased in the US, as many posters above have pointed out. I might add still one: infrastructure building. It is very energy-intensive and was at its height in the '60s and '70s but has decreased since. The US infrastructure may now be in a state of disinvestment - it is deteriorating in lack of maintenance. In energy terms this means that the energy "invested" in the infrastructure is now taken out.

The overall view seems to be that the decreasing oil (or better - energy) intensity of the USD economy is for a great part, if not entirely, a statistical illusion, especially since the '80s. The energy efficiency gains have not been as significant as claimed.

The correlation between energy use and economic growth is very strong and this means that the physical supply of total energy will be decisive in estimating the effects of an oil shock - not just the prices.

I argue here that US economy is not less vulnerable to an oil shock than 30 years ago. I shall use a simple example, with only approximate statistics. The average american citizen is now twice wealthier than 30 years ago and uses about the same amount of gasoline for the private car, paying now only 3% of disposable income for gasoline instead of 6% in the (crude oil squeezed) year of 1980.
Now, let's suppose a world oil supply disruption occurs on the same magnitude as in 1980. It's not unreasonable to think that for continuing life as usual, the americans may be willing to pay up to 6% of the now enhanced income. And this may bring the price of crude oil much above 100$ per barrel.
Back to macroeconomics, this may bring an increase of 300 billion $ of US trade deficit , on top of the 700 billions $ already in place. All this in a stressed world economy.
Most probably, deep recession, possibly world recession shall impede this scenario from coming true. Market forces are great for gradual change. Political leadership is in need at discontinuities.