+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

Oil Price Shocks Aren't As Harmful As They Used To Be

Jul 1, 2014, 07:25 IST

Oil is a critical source of energy. In the past, a major oil price shock meant devastation for economic growth.

Advertisement

"Our obsession with oil prices comes with good reason," writes Morgan Stanley economist Ellen Zentner. "Abrupt and sharp increases in oil prices have played a key role in precipitating recessions in 1973-75, 1980-81, 1990-91, 2001 and 2008-09."

Recent turmoil in Iraq has sent oil prices much higher. But economists aren't ready to freak out just yet.

"Over time, however, those shocks to the relative price of oil have spurred innovations that have led to a more efficient use of energy inputs," continued Zentner. "Alongside growing use of other energy inputs, those innovations have reduced the world economy's dependence on oil."

Zentner presented this chart showing how a decreasing amount of energy has been needed to generated a dollar's worth of GDP in the world.

Advertisement

Morgan Stanley

It may not be immediately intuitive how this could be.

Zentner offers a more micro level example that anyone who's been in a car can appreciate.

US households have also adjusted consumption patterns over time. When gasoline prices rise, drivers tend to reduce mileage in response and/or seek out more fuel efficient vehicles. This altered behavior, coupled with shifting demographic factors and a slow labor market recovery since the financial crisis, has weighed on vehicle miles driven and lessens the aggregate impact of price increases at the pump. In the 12 months ended May 2014, average vehicle miles driven remained below the previous peak (reached in November 2007) for a 76th straight month. In 1990, consumers devoted 3.8% of total consumption to motor fuels. By 2013, that share had fallen to 2.3% (Exhibit 3).

Here's her chart. It shares a similar downward slope as the chart above.

Advertisement

Morgan Stanley

It's certainly worth noting that innovation isn't just about fuel efficiency. Technological developments have enabled U.S. oil drillers to extract fossil fuels from shale in North Dakota, Pennsylvania, Texas and elsewhere using unconventional methods. Indeed, thanks to the shale boom, we might not even see Middle East-triggered oil price spikes we've seen in past.

You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article