Oil and Gas Energy and the US Economy

Abstract

Abstract The US economy and use of oil and gas energy grew rapidly together for many decades. This seemingly symbiotic relationship ended when nominal oil prices jumped eight-fold (1973–81), triggering the worst US recession since World War II. Subsequent recessions have followed every significant, if generally short-term, oil price hike. Economic growth has happened when oil prices were either relatively low or stable. The oil price jump of the '70s also correlates with a nine-fold increase in natural gas price, a four-fold increase in coal price, a three-fold increase in cost of electricity, and a significant drop in energy demand. These events provide bases for better understanding of the relationship between energy use and economic growth. Although the conventional measure of "economic growth" is percentage change in GDP, other criteria - inflation, interest rates, unemployment, relative strength of currency, imports and exports, corporate profitability, etc. - are also important and are reviewed since the "economy" is complex and multidimensional. Sudden energy price changes provide measures of elasticity (effect of price on supply and demand) essential for better understanding and predictions of energy use and economic growth. Knowledge of elasticity is vital for forecasting, planning and policy development. Inevitable constraints imposed by changing environmental and political considerations impact both future US energy use and economic activity not unlike actual physical shortages. Possible means for alleviating adverse impacts, and for transitioning from oil and gas to other energy sources must be explored. Importantly, the potentially significant impacts of both anticipated and unforeseen technological breakthroughs must be evaluated and incorporated into any meaningful view of the future. Introduction: A History of US Oil and Gas Colonel Edwin L. Drake discovered oil in the US in 1859. Five years later, production was 6000 BOPD, and oil's value for illumination spurred growth to 83,000 BOPD by 1882, at an annual rate of 15%. Subsequently, Appalachian Basin growth faltered; by 1918 it accounted for only 8% of US total of 1 million BOPD, as large new fields were found in California, Texas, and Oklahoma. Between 1900 and 1920, oil and gas consumption in the US grew at 11% and 9% respectively, as use of automobiles with internal combustion engines proliferated1. Table 1 illustrates subsequent consumption as MBOPD and MMCFPD and as quadrillion BTU's (or quads), and also oil and gas energy as a percent of total US energy use2,3. (One quad is 172 million bbls or nearly 500 MBOPD, and also equates to 0.9 TCF or about 2.5 BCFPD). Significant changes either in energy use or the economy are illustrated. The period 1920–29 is the post WW I boom, 1929–40 is the Great Depression, 1940–45 is WW II, 1945 to 1970 covers the post WW II boom, 1970–83 is the period of oil price increase and uncertainty triggered by the Arab Oil Embargo and the Iran-Iraq War, and 1983 to 2003 is the post price shock period beginning at the low point in US energy consumption in 1983.