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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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Location: Washington, D.C.

greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

04 July 2006

How vulnerable to oil prices? Part 3

Two more thoughts on this mini series. The first is a closer look at two energy intensive industries: transportation and utilities. There are a few interesting points to be made here; the first is that supply costs (which include other materials and services, but not labor and capital) rose on average by 12% between 2000-2004, even though energy prices rose by 23%, indicating that high energy prices were not driving supply costs at the same pace. Most industries were also able to pass on costs to consumers (costs increased by 12%, prices by 10%). In three industries, they were not: pipelines, warehousing and utilities. The former two happen to have high elasticities, meaning that their business output fluctuates along with prices preventing them from passing on costs to customers. Utilities managed to pass on enough costs (19% rise in prices, 28% rise in costs), while maintaining a healthy profit increase (at least in 2004: 7%).

The second thought comes from this graph, which plots gross output based on its various components: capital, labor, energy, materials, and services. The line shows expenditures on energy as an intermediate input (used to generate a good or service); although spending on energy has increased (from $350bn in 2000 to 430bn in 2004), it still forms a tiny fraction of overall output: no more than 2% of gross output, or 5% of costs (energy, materials and services). And so, despite the increase in prices, energy costs remain a small expenditure for firms.

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My parting thought on this series is that the main mechanisms through which high energy prices would force an economic slowdown seem not to operate. Granted, much of the current growth, in the US and elsewhere, is fed by macroeconomic conditions whose longevity may be questionable (especially debt spending in the US). At the same time, energy seems to form just a part of that equation, and not a big one either. Whether energy costs do not matter or are guised by booming economies who are bound to come crushing down remains to be seen. But there needs to be much more attention on this great puzzle, why are we not more vulnerable to high oil prices?

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