Sunday, July 16, 2006

Energy Consumption as Percent of GDP

by Bill McBride on 7/16/2006 08:31:00 PM

From this Christian Science Monitor article: Oil spike: a surmountable challenge?

... back in 1981, energy was a much larger part of the US economy, representing 14 percent of the gross domestic product, Wyss says. Because energy was so crucial back then, the Federal Reserve pushed interest rates sharply higher to curtail inflation.

Today, energy represents 7 percent of GDP. "The Fed will not have to jerk interest rates up," says Wyss. "We are in better shape."
I've heard this statement before on CNBC several times. Is energy consumption really only 7% of GDP?

First, I checked with the EIA: Table 1.5 Energy Consumption, Expenditures. Sure enough, for the last 2 years reported, energy consumption was 7% and 6.8% of GDP. Of course those were for the years 2000 and 2001, respectively.

Energy prices have increased significantly faster than GDP over the last 5 years. Sure enough, it appears Mr. Wyss is using old numbers.

Click on graph for larger image.

Using a combination of EIA numbers for energy sources, and BLS numbers for price changes, and holding consumption steady (very conservative), this graph shows that US Energy Consumption is around 11.2% of GDP right now. (UPDATE NOTE: I'll try to do a more comprehensive calculation later this week - with links and my calculations. this was a rough estimate)

As an aside, ignore Mr. Wyss' comments on the FED. The FED looks primarily at core inflation rates (like Core CPI and PCE). Alhtough the FED is concerned about higher energy prices feeding through to core inflation rates, they aren't really focused directly on energy prices.

On energy issues, see Dr. Hamilton's: Can the economy shrug off $80 oil?