skip to main content
Close Icon We use cookies to improve your website experience.  To learn about our use of cookies and how you can manage your cookie settings, please see our Cookie Policy.  By continuing to use the website, you consent to our use of cookies.
Global Search Configuration
  • Correlation between oil price moves and consumer spending power has weakened
  • Energy sector is an important contributor to investment element of GDP
  • Energy Intensity has fallen markedly and is set to decline further

By David Ader, Informa Financial Intelligence Chief Market Strategist

The price of oil has pretty much doubled from a year ago, raising questions about whether the increase will be a hit to consumers and add to inflation pressures. This isn't so far-fetched. At one time, lower oil prices -- we really mean gas prices -- conformed to an uptick in consumer spending in the form of at-the-pump tax relief. The inverse held true; higher gas prices were an effective tax.

Alas, this perspective and the potential correlation has weakened, which is to say that lower or higher oil/gas prices have less impact on gross domestic product and, to a degree, on inflation. In short, there are some good reasons to be concerned about higher energy prices. A "tax" on the consumer shouldn't rank too high as a risk.

In a curious twist of fate, as the U.S. becomes more of a fuel producer, lower energy prices could have an adverse economic impact. The windfall to the consumer is gone and has been replaced by stress on the energy sector. Granted, the latter is not a big employer, but in terms of growth it was perhaps the single largest contributor to business investment in the GDP equation until the oil bust of 2014.

The main question here involves our use of energy. There is a concept called “Energy Intensity," which measures the amount of energy in British Thermal Units for each dollar of GDP. The measure, produced by the U.S. Energy Information Administration, has been in steep decline since the 1970s and, according to the EIA, will decline further in coming years. Here are some numbers: In 1974, we consumed about 10,000 BTUs for every dollar of GDP. That's in constant prices (adjusted for inflation). That figure was more or less steady from the 1950s to the 1970s. But things changed in the late 70s and that figure has been dropping ever since.


Energy Intensity


The latest data, from the end of 2014, showed that number had fallen to 3,880 BTUs. A few years ago, EIA projected usage would drop by almost half by 2040.  This wasn't just happening in the U.S. either. In July, the EIA noted that energy intensity had dropped 32 percent as a world average from 1990-2015, 32 percent in OECD countries and 40 percent in non-OECD countries.


US avg MPG


There are many reasons for this decline. First, the economies of the U.S. and Western Europe are far less based on manufacturing, which used energy rather more than economies based on services. Another reason is that we are more fuel efficient. Take cars. In 1990, the average car used 28 miles per gallon and light trucks burned 20.8 mpg. By 2015, those figures were 36.4 and 26.3, respectively, according to Bureau of Transportation statistics. There has been a particularly sharp ramping up in fuel efficiency in the last ten years. Recognizing the possibility of looser regulations under a Trump administration, the EPA did reaffirmed in December that the goal is for a 54.5 mpg target by 2025.


EIA All Motor vehicles


Also, we seem to be driving less. The EIA indicated that as of 2014, the average annual mileage of a vehicle had declined to 11,621 miles from more than 12,000 from about 1996 to 2006. Think about it: We have better fuel efficiency, and people are driving less. I'm tempted to suggest that more urban youth are riding bicycles around Brooklyn, and workers in general are moving back to cities, while aging baby boomers commute less as they wind down or fully retire.

This piece first appeared in Bloomberg View

Recommended Articles

  • IGM FX and Rates

    China Insight: From Peking Founder to MPA loosening

    20 Feb 2020

    China Insight: From Peking Founder to MPA loosening

  • IGM Credit, IGM FX and Rates

    The Context 02.18.20

    18 Feb 2020

    Inside this week’s edition of The Context, Financial Intelligence thought leaders discuss: The JPY Week - Bias is Bearish Has the impact of coronavirus now peaked? We say such talk is premature and an underlying bid Usd/Jpy will continue to slow into 110.00-plus. Euro FIG Snapshot: Virus Protection Fully Operational With the recovery in risk assets extending into a second week, more issuers emerging from blackout and the credit market's virus protection evidently up to date, the pace picked up in the non-covered primary FIG market last week. Equities Ignore, Hope … Euro Indicates Slowing EMU Economy It doesn’t take much to light a fire under equities, but it is going to take much more to push bond yields higher... Read more from The Context and subscribe to have it delivered to your inbox each week!

    Topics Industry News

  • IGM Credit, IGM FX and Rates

    China Insight: Credit Bonds Will Play Catch up on More Supportive Measures

    By Tim Cheung 18 Feb 2020

    The authorities, MOF, PBOC and CBIRC, hosted a joint conference on Feb 7 to provide an update on supportive policies in light of the coronavirus situation. We believe the conference delivered a loosening bias tone as a nimble response to the virus outbreak. Next move following the huge liquidity injection and provision of first batch of special relending funds to more than a dozen of banks is going to be an LPR cut on 20 Feb. We expect a 10bp cut in both 1-year and 5-year LPRs on 20 Feb (chart 1), similar to the magnitude of the latest OMO rate cut. A more sizable cut may mean the policymakers are opting for more aggressive monetary easing to cushion the economic shocks arising from the coronavirus outbreak.      

    Topics Industry News


Any questions? Speak to a specialist

Would you like to request sample data or analysis from Informa Financial Intelligence? 

See how our tailored solutions can help you gain a competitive advantage: