It’s no secret that energy prices have dropped dramatically, especially for oil and natural gas. The graph above looks at the consumer side and displays the same series under two concepts: real and nominal. The nominal series for personal expenditures (in red) shows that U.S. households are spending much less for energy. The real series (in blue) shows no significant trend. Indeed, energy is a very inelastic commodity: At least in the short run, consumption hardly changes even as its price changes. Fuel is actually a textbook example of an inelastic good, and recent data have proven it again.
Now let’s turn to the producer side. The graph below shows that consumption hasn’t changed much but that employment has taken quite a dive. It looks like this has to do mostly with prospecting and digging of new wells, as investment in this sector seems to have crashed. If this reduction in investment lasts for a while, production capacity will start to decrease, at least in the U.S. This is textbook economics as well: The relatively high price for oil generated a lot of investment in the sector, which has been producing much more than before. These conditions, at least in part, lead to a reduction in the price. The supply is adapting by not adding new capacity and letting existing capacity slowly wear out. The action here is all on the supply side, as demand is very price-inelastic.
How these graphs were created: For the first graph, search for “energy personal expenditures.” You should find the two series shown here: Check them both and click on “Add to Graph.” Restrict the sample period to the past five years. For the second graph, search for “real investment mining” and add the series to the graph. Then search for “employees mining oil” and add that series; set the y-axis for this second series to “right.” Then restrict the sample period to the past five years.
Suggested by Christian Zimmermann
Most economists believe lower oil prices are positive for the economy: They lead to lower gasoline and diesel prices, which tend to reduce headline inflation, which increases consumer purchasing power. Lower oil prices also tend to reduce operating expenses for transportation firms, such as airlines, trucking, and delivery services. The sharp drop in crude oil prices since mid-June 2014 is generally expected to produce positive (if temporary) economic effects. Lower oil prices generally don’t benefit energy producers, but the vast majority of households, firms, and organizations are net consumers, not net producers; so, lower prices still tend to bring net benefits.
One way the effects of lower oil prices reveal themselves is through mining activity. (More precisely, “real private nonresidential fixed investment in mining exploration, shafts, and wells.”) In 2013, fixed private investment in mining activity was about 5 percent of total fixed private investment and only 0.8 percent of real GDP. Still, since the third quarter of 2009, mining activity has increased at a 17.1 percent annual rate—much faster than the 5.5 percent rate of gain in total fixed private investment.
As the graph shows, mining activity (which includes drilling) is positively correlated with crude oil prices. When oil prices rise, this activity increases and so does investment in it. When oil prices fall, this activity slows and investment in it falls.
How this graph was created: Search for mining investment to find the first series, then add “Crude oil prices WTI” for the second. Limit the sample to start in 1999.
Suggested by Kevin Kliesen
View on FRED, series used in this post: