Print This Post
Less Driving and Lower Gas Prices are Not the Important Factor
U.S. driving mileage is running 89 billion miles per year less now than it was a year ago according to analyst Mark Perry. The resulting savings in oil usage at 20 mpg and 43 gallons of gas per barrel of oil is a reduction of only 284,000 barrels per day due to less driving. That’s not nothing but measured against either the 21 mb/d of U.S. oil usage last year or the 85 mb/d of global use last year, it is not earth shaking. It represents only a 1.3% decline in total U.S. oil use. The total decline in U.S. oil use is running roughly 5% according to the EIA. So the difference must come from less driving plus a combination of less trucking, less industrial use of oil, and more efficient automobiles in the fleet. Or else the estimate of miles driven is still too high.
More interesting is Perry’s clearly accurate estimate that lower oil prices are saving U.S. consumers over $300B in gasoline costs, which is equivalent to a tax cut of that magnitude. The inverse effect, as I have written, was an effective tax increase caused by the increase in oil prices from 2004 - 2008. What is most interesting is that the higher oil price seems to have had little short term impact on GDP. The rise in oil prices certainly did not stop GDP from continuing to increase from 2004 - mid-2008. And it can be argued (correctly I think) that it was the credit crisis and housing crisis that brought U.S. GDP down in 2008, not the increase in oil prices.
So the bottom line implication, it seems to me, is that the direct impact of government actions to spur the economy can have only limited effect unless they are of astronomical amounts not being discussed, at least in the public press. Krugman recently argued in a similar vein that it will take a $600B spending program by the new Obama administration to have a real impact in spurring the economy. I think these “oil tax” numbers back up his assertion.
Probably the most important impact that a new Obama administration could have is on consumer psychology. If people begin to believe that a new government spending plan will bring the economy back to life, they may begin spending money themselves and acting like the recession is coming to an end. That, much more than government spending, would be likely to have a real impact toward growing GDP again.
Tags: peak oil investments
Print This Post
7 responses so far ↓
1 KV // Nov 21, 2008 at 12:24 pm
Tax increase or decrease has direct impact on the US surplus (some day!) and deficit. Oil price change may appear like a tax increase or decrease at the consumer’s pocket book level, but it has inverse impact on the US Govt. receipts.
And, we should not forget that to pay for added cost of oil, we the consumers must either earn more or displace some other need. There is nothing free.
Perry’s argument falls apart if we use the basic accounting principles, set up T-accounts for oil/gas cost, and tax cost and keep the transactions separate and do not commingle the funds! But, this is hard to do when we only think at Balance Sheet level.
2 robert essian // Nov 21, 2008 at 1:07 pm
Agreed, phychology is huge.
The market is not moving lower do to fundamentals that’s for sure. It’s FEAR.
The people (like myself) are watching every dime because trust is gone and we want Obama. Plain and simple…Peace
3 jkingsdale // Nov 21, 2008 at 3:10 pm
KV: my post relates to oil prices as a tax hike or tax reduction that either hurts or helps consumers and therefore GDP. The much larger point is that if Obama wants to stimulate the economy it will take a lot more quantity of stimulus to have an impact than is being discussed - as demonstrated by the lack of impact that higher oil prices have had. In other words, it just takes a whole lot to move the ship. Your post does not address that point - in fact you seem unaware of what the whole matter is about.
Perry does not make “an argument” - he just supplies the data.
You don’t want us to “forget” that consumers must pay for higher oil costs by reducing other purchases but nobody has forgotten that - it’s a basic part of the point I have made.
I’m only responding here because I find your post to be nonsense. I hope that if you want to post here in the future you will try to be more reasoned, try to understand what the matter is under discussion, and address it in some intelligent way.
4 KV // Nov 22, 2008 at 1:09 am
Jim,
When I wrote the first comment, I was in agreement (and I still am) with you that it will take a very significant stimulus to turn around the economy. I do not think $600B is enough, and I expect unemployment to rise much faster, I have heard stimulus numbers up to $1,500B, but there is no scope or measure of what we face, so it is speculation at best. Fundamentally, demand destruction, not just in oil, but all across, is so high that nobody really knows where we are going. Compare oil to copper, aluminum, and steel, and you will see the picture. I believe, RE’s observation that people have tightened up, is on the mark.
Regarding Perry: my intent was to convey that we should compare apples with apples. Perry is not alone in taking stats from one aspect and apply to the other – in this case, tax cuts and oil price. Social sciences, or dismal sciences, are replete with comparisons and correlations among unrelated datasets. You would agree with me immediately that If I were to extend Perry’s method using home price data, it would be wrong. Only commonality between tax cut and drop in oil price is that they impact pocket book nearly immediately.
In many of my previous posts, I have maintained that oil prices were pushed up by speculation and the correction was eminent. I did not anticipate oil to touch near $150 and the correction to be so steep and so fast. At the link below, there is a chart that compares collapse of tech (Nasdaq 2000), homebuilders, financials and oil. The oil price correction is the steepest of all four (over 60% in less than 100 days!).
Link: http://bespokeinvest.typepad.com/bespoke/2008/11/current-asset-declines-on-par-or-worse-than-the-nasdaq-bust.html
5 KV // Nov 22, 2008 at 8:01 am
Jim,
I read Perry’s post at Seeking Alpha and also at his website.
His thesis is that drop in gas price from $4.12 to $2 per gallon equals to a saving of $300 Billions annually.
Perry does not equate this to a hypothetical tax cut, nor does he state that this projection is after tax. He fails to state that, this is not a saving, but projected expense reduction for the coming year provided that gas prices remain at or below $2 per gallon.
I have no problem if you compare this projected expense reduction similar to reduction in taxes (another expense), but not as a tax cut.
6 Robert Essian // Nov 22, 2008 at 11:36 am
Professor, the article by Keith Fitz-Gerald has me quite interested.
I have been trying to find anything that would help me apply numbers to the crude oil required to build out an infrastructure project. Based on the numbers of workers needed to start and finish a said project would I be able to apply these numbers that Mr. Perry uses to figure out what crude oil would be necessary to complete a project the size China is contemplating in an article written by Mr. Fitz-Gerald (seeking alpha).
Specifically, how much crude oil is necessary to build out a project that will employ 40 million people for 24 months and 6 million for one year (plus) as is estimated to complete road and rail projects in China.
Is there a general assumption or percentage applied to a project this size because it is so hard to determine exactly how much energy would be used?
For example: When I bid a job no matter the size, 20% is used for materials plus labor and profit.
Does any of this make sense? Help!…Anyone…Peace and Happy Thanks Giving to all and may you and your family’s be safe.
7 MKR // Nov 22, 2008 at 10:46 pm
No question that the recent collapse in oil prices may (but has yet to) give consumers both enough cash and confidence to stimulate a heartbeat back into the economy. If nothing else, I fully expect to see miles traveled by passenger vehicles skyrocket as the per gallon cost of gas approaches $1.50/gallon.
Going forward, it will be interesting to watch the tug of war between low prices and slowing economy to determine were demand ultimately settles out. The impact of collapsing oil prices on supply is an underdiscussed topic with this “supply destruction” actually having a greater impact future oil price than any increase in demand. $40/bbl or less for any extended period of time will lead to industry consolidation as the smaller, higher cost exploration companies run out of cash. At $40/bbl who is going to extend credit to anyone drilling for oil? Riches to the investor who accurately forecasts the intersection of increasing demand and dwindling supply.
Leave a Comment