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Politics : Politics for Pros- moderated -- Ignore unavailable to you. Want to Upgrade?

To: LindyBill who wrote (103720)	3/8/2005 6:38:50 PM
From: LindyBill	Read Replies (2) \| Respond to of 793838

Power By Kudlow Money Politic$ At $55 per barrel, the price of oil is at record levels. Even so, the economy posted 4.4 percent real growth in 2004 and will have another strong year in 2005. The economy is taking the price increase in stride. It pays not to be swept up in the oil price frenzy. Like any commodity price, the price of oil needs to be viewed in real terms. Using the personal consumption expenditures (PCE) price index, we see that the current real oil price of $49 is still a good deal lower than the $77 peak in 1980. Applied more generally, the real level of the broad-based CRB spot commodities index (which excludes gold and oil) is 64 percent lower than the mid-1970s peak. Clearly, the recent prices are not as dire as some would have us believe. Moreover, it needs emphasizing that the current run-up in oil prices is due to a demand shock, caused by the growth ramp-up in India, China and the US. There is no problem with the flow of oil. Indeed, there are now 2745 drilling rigs in operation globally, the most since early 1986. This is not the same situation as the supply shock-induced price spikes of the 1970s. The economy has also greatly increased its energy efficiency. In 1970, 18 thousand Btus of energy was consumed to produce a dollar of real output. The energy requirement has now dropped to 9.3 thousand Btus, almost a 50 percent improvement in energy efficiency. If we focus on petroleum alone, we find that 7.8 thousand Btus of petroleum-derived energy was required per dollar of real output in 1970, but now only 3.7 thousand Btus of energy is needed, a 53 percent improvement. In addition, the economy has diversified its sources of energy; petroleum accounted for 48 percent of total energy consumption in 1977 but the share has now dropped to 40 percent. This is not to say that higher energy prices do not have an effect on the economy. A rough rule-of-thumb, using the difference between the overall and core PCE inflation rates (2.2 percent and 1.6 percent, respectively), implies that the higher prices lowered economic growth by about 0.6 percentage points. Nonetheless, oil prices will ease as more investment capital increases production capacity, technological advances will keep energy efficiency improving and will find more clean sources of energy from coal, gas, and nuclear power, and the economy will keep growing.