Tuesday, December 30, 2014

5 graphs for 2015: #4, the price of oil vs. gdp

  - by New Deal democrat

This is a continuation of my series of economic relationships I'll be paying particular attention to in 2015.  Yesterday was #5: mortgage refinancing

Relationship #4 is about whether the a new, lower range of gas prices remains for awhile.  The importance of oil and gas prices is easy to understand, given their recent collapse.  Lower prices put more money in consumers' pockets.  Conversely, when gas prices rise to a certain level of income, consumers feel pinched - and pinch the economy. 

In 2011 - 2014, gas prices remained quite high as a share of income, constricting the economy like a choke collar whenever it seemed poised to attain escape velocity.

Two similar metrics to measure the overall impact of gas prices are (1) the price of gas as a share of GDP, and (2) the price of gas as a share of disposable income.Here is the price of gas as a share of GDP compared with quarterly GDP growth: 

Generally, the closer the "oil choke collar" comes to engaging, the less the GDP growth.

In the past 10 years, whenever there has been a steep decline in the price of gas, it has bounced by about $0.25 to $0.30 off its winter low quickly, and risen on average about $1.00/gallon to its summer highs, as shown in the following graph from GasBuddy:

As I write this, gas costs about $2.25/gallon.  If that were the low, I would expect a quick bounce to about $2.50, and then a springtime increase to a peak of about $3.25/gallon.

All else remaining equal, if the price of gas remains in a lower overall range in 2015, we should see an acceleration of GDP growth, and with it, more jobs.