Economy: Tug Of War

The oil price is hovering north of $100 and gas prizes at the pump are close to record high. But the U.S. economy is doing pretty well in spite of the high energy costs. The  current situation is a tug of war. The rising oil price is indeed sucking a lot of money out of the economy and is slowing down the recovery. High costs for gas and heating leave the consumers less money to spend for other goods. I guess the high energy costs are one of the reasons that the recent recovery is so disappointing slow.

But nevertheless, there are still other factors which are pushing the economy forward and are overcompensating the negative oil price effect up to now. Interest rates are very low. Consumers are still optimistic and free-spending as the solid retail sales prove (driveby). Manufacturing is still growing thanks to the rising consumer expenditures and the climbing export. And the job market is healing in spite of the weak numbers from last Friday.

There also are some factors which are diminishing the negative effect of the rising oil costs. Helpful were mild winter and spring which reduced the heating costs. Many companies and consumer also save money because the price of natural gas is close to record lows. But I guess one factor is more important: Companies and consumer use less of the expensive energy as they did in the past, thanks to the rising energy efficiency.

U.S. energy consumption per dollar of output in 2011 was 2% less than 2010 and half of the energy required in 1979 reported the U.S. Energy Information Administration (mjperry.blogspot). This is result of the ongoing technological progress which reduces the energy consumption of machines. From 2002 to 2011, the average fuel economy of vehicles sold in the United States improved 20 percent to 23.2 mpg from 19.4, according to consumer research firm Edmunds.com (reuters ). The fuel economy of 2012 models is more than 16 percent higher than in 2008, Edmunds.com said.

But not just cars are getting more and more energy efficient: Modern refrigerators, washing machines, air conditioners and many other household appliances use less electricity than older models. This is a clear response to the rising costs of energy and part of the technological progress. For centuries people respond to rising commodity costs and by finding cheaper alternatives. As a result oil is getting less important to our lives. Oil consumption was 4.8 percent of U.S. national income in 2010, compared with 9.7 percent in 1981, shows a Bloomberg report (bloomberg).