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By New_Deal_democrat October 9, 2014 10:00 am
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Is the US economy finally about to break free of the Oil choke collar?

If you've read my Weekly Indicator columns, you know that I have frequently mentioned the Oil choke collar.   By that I mean, in the aftermath of the Great Recession, every time the economy appeared to pick up steam, gasoline prices would rocket toward $4 a gallon.  This slowed the economy down, as a result of which gas prices would fall, starting the cycle again.  In other words, gas prices acted as a governor regulating the speed of the economy. Or, like a choke collar.

 

To put this in perspective, here is how oil prices rose in the 1970s and early 1980s (blue) vs. in the 2000s (red):

 

 

Oil prices rose by a similar amount, over a slightly longer period, with an equivalent oil "shock" in 2007-08.

 

Now there are signs that the US may finally be breaking free, at least for awhile, of the Oil choke collar.  On Monday, the E.I.A. reported that regular gas prices in the US were slightly under $3.30 a gallon,  In 2011-12, gas prices were only lower than this for 5 weeks in December and January. In 2012-13, they were only lower than this for 3 weeks.  Last year the lowest gas prices got was $3.19 on a weekly basis, in November. Here's how gasoline prices from 2011 to the present look:

 

 

In short, there is a very good chance that at some point in the next few months - or even weeks - we will see a new 4 year low in gas prices in the US.

 

Back in early 2011, I wrote a piece entitled, How Oil's Choke Hold on the economy will end.  In that article, I identified 3 trends that I expected to contribute:

1.  alternative fuels and technology

2.  conservation

3.  increased exploration.

 

I concluded that

the Oil choke hold on the economy will not last forever. I claim no clairvoyance, but a good guess is that by 2013 or 2014, the combination of alternative fuels and technology, conservation, and exploration will relieve the current situation.

Last year, I updated the analysis, separately examining alternate fuels (here and here), exploration (here), and conservation (here), showing how each was improving.  Now is a good time to re-examine how each of these trends is affecting the supply and price of energy:

 

1. Alternate fuels and technology

By last year there was a "substantial increase in sales of hybrid vehicles and more energy-efficient vehicles, as well as the greatly increased US crude oil production. "

There are indications that sales of hybrid vehicles have plateaued:

 Although the number of hybrid offerings offered has almost doubled--from 24 in 2009 to 47 in 2014--U.S. hybrid sales haven't dramatically increased. They reached 2.4 percent for 2009, peaked at 3.3 percent in 2013, and presently stand at 3.0 percent for this year through March.

Part of this may be that even better alternatives have appeared.  Additionally, as we'll see below, the efficiency of the US gas powered fleet has improved dramatically.

 

In contrast to hybrids, natural gas reserves have continued to increase dramatically.  Here's a chart from the E.I.A. showing natural gas reserves now:

 

 

Last year I cited an article that said, "America's commercial transportation fleet is becoming natural-gas-powered with astonishing rapidity."  This trend has continued.  The Wall Street Journal reported earlier this year, that natural gas vehicles will displace 10-12 times more gasoline consumption than than the 250,000 electric vehicles on road to date.

 

Meanwhile, the US motor vehicle fleet continues rapidly to grow more efficient, as reported just yesterday:

In its annual report on fuel economy and carbon-dioxide emissions, the [EPA] said Wednesday that 2013 model year vehicles achieved an average of 24.1 miles per gallon. That’s up 0.5 mpg from the previous year and an increase of nearly 5 mpg since 2004.

That's about a 20% gain in efficiency.  Not including yesterday, here's a graph showing the increased fleet efficiency since before the Great Recession:

 

 

2. Conservation

Americans, especially younger Americans, are simply using less gasoline.  Here is a chart from Doug Short showing that gasoline usage peaked before the Great Recession, and has steadily declined ever since:

 

Not coincidentally, according to the American Mass Transit Association, the use of mass transit keeps on increasing:

In 2013 Americans took 10.7 billion trips on public transportation, which is the highest annual public transit ridership number in 57 years, according to a report released today by the American Public Transportation Association (APTA). This was the eighth year in a row that more than 10 billion trips were taken on public transportation systems nationwide.  While vehicle miles traveled on roads (VMT) went up 0.3 percent, public transportation use in 2013 increased by 1.1 percent.

....  Public transportation systems nationwide – in small, medium, and large communities – saw ridership increases. Some reported all-time high ridership numbers.

 

3. Exploration

In 2011 and again last year, I pointed to the Guara field (renamed the Sapinhoa field), and also the Macondo field in the Gulf of Mexico, infamously the source of BP's undersea "gusher" in 2010.

 

The Macondo field has not generated new Oil yet, but "oil and gas activity in the region is projected to return -- and in come cases exceed -- levels seen before the spill."  Brazil's Sapinhoa field is now producting over 200,000 barrels a day.  And I didn't even mention Canada's tar sands (note: I'm not ignoring the environmental concerns.  I'm simply reporting the data).

 

The US itself is now producing more barrels of oil per day than even Saudi Arabia.  Here's the graph (h/t Scott Grannis):

 

In summary, I don't think the Oil choke collar is going away forever.  There has been no magic bullet.  But the coalescing of market forces making alternate fuels and technology attractive, rewarding conservation, and increased exploration bringing new product online, is suggesting the fulfillment of the forecast I made back in early 2011.  If the US economy breaks free of the Oil choke collar, even for a year or two, we can expect an acceleration of growth, consumption, and jobs.

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