Figure 1

Figure 1 shows the estimated cost of USA net oil imports relative to USA GDP. It is calculated by subtracting annual USA domestic oil production from annual USA oil consumption, multiplying by the average annual oil import price and dividing by the annual GDP. Data source used are: USA GDP, http://www.bea.doc.gov/bea/A-Z/A-ZIndex_h.htm  Annual oil consumption, production, BP Statistical Review of World Energy 2005, http://www.bp.com/genericsection.do?categoryId=92&contentId=7005893

Oil prices, http://www.eia.doe.gov/emeu/international/petroleu.html#CrudePrices

 

Examining Figure 1 suggests three broad historical conclusions:

1)      During the main periods of generally sustained and brisk economic growth (1960’s and 1990’s) the cost of net oil imports to the USA economy were less than 1% of GDP.

2)      The economic stagflation era of the mid to late 1970’s corresponded to a time when the cost of the USA’s net oil imports exceeded 1.5% of GDP but was less than 2%.

3)      In the 1979/1980 period when oil prices reached their highest ever level in real terms (post 19th century) the USA’s net oil import costs rose to a peak of 3.4% and several years of economic recession followed.

 

The current upward spiral of oil prices began in late 2003. Last year the price reached a peak in late October of over $50/bbl. Although this price peak captured headlines the average annual price for 2004 was only $38/bbl (Brent spot) and the average annual cost of USA net oil imports just nudged 1.5% of GDP.

 

Using history as a guide suggests that the USA economy may become stressed once the cost of net oil imports exceeds and stays above 1.5% of GDP. On current trends the annual average oil price for 2005 will be in the range U$55 to 60/bbl and the cost of net oil imports will be just over 2% of GDP.  At this level the conditions of stagflation may reappear (i.e anemic economic growth plus high inflation) but the economy would not necessarily ‘tank’ into recession.  The projection beyond 2005 is based on oil prices in the range $70 to $90/bbl but is not meant to be a forecast. It is simply probing to find conditions which would mimic the pre-recession era of 1979 when the cost of USA net oil imports reached 3.4% of GDP.   However, Figure 2 is more useful for this purpose as it gives a more direct clue as to what level of oil prices might lead to ‘tanking’ of the economy.

 

Figure 2

Figure 2 shows the same costs of USA net oil imports relative to USA GDP as per Figure 1 but the data are plotted versus oil price instead of time. (Time direction for the 1970’s and 1980’s is indicated by the upward and downward arrows respectively).

 

 The oil price used in Figure 2 is the average annual Brent spot price expressed in real terms 2005 dollars. The green shaded area highlights when net oil import costs were less than or equal to 1.5% of GDP and from the time label it can be seen that year 2004 fell just on the edge of this ‘envelope’.  Perhaps therefore it is no surprise that we did not see the economy ‘tank’ during 2004.  For 2005, during which the oil price will average $55 to $60/bbl the chart suggests that the economy will be entering a danger zone. Once again using history as the guide and assuming that an annual average net oil import cost in excess of 3% GDP is an ‘economic tipping point’ the chart also suggests that this will require  annual average oil prices in excess of  $70/bbl and indeed closer to $80/bbl. The conditions for this to happen are getting closer but are not quite there yet.