The cost of energy

Economists in recent years have attempted to assuage us regarding the increasing cost of energy, specifically petrol. I remember Ross Gittins writing in the Sydney Morning Herald a few years ago that, despite the rising cost of petrol, energy costs were now much smaller a percentage of GDP than they were during the energy crisis-ridden years of the 1970s.

Of course Gittins was correct. So too were the writers of oil-related articles in The Economist. Economic growth since the early 1980s has exceeded the growth of energy costs, which means that energy has become cheaper.

Unfortunately, the information given to us by these writers probably allowed us to feel a bit more secure. After all, if Economic growth continues to outpace energy costs, who cares how much oil and electricity costs?

Well, the results are in. According to this article from Angry Bear, US energy costs as a percentage of nominal consumer spending have reached 6.6%. Although this is lower than the average cost of energy during the 1970s, it is higher than the 6.2% low of the 1970s. The all time low was 4.2%, experienced during the late 1990s - the period when SUV and Hummer sales took off.

Furthermore, the graph used at Angry Bear does not include data from the last three months, which would have seen both an increase in oil prices and a drop in consumer spending.

Gittins and The Economist were right when they pointed out that energy costs had diminished since the 1970s, but they were unable to predict that energy costs in the last few years would outpace GDP growth.

In short - energy costs are now rivalling the 1970s in terms of their impact upon consumers. The economic shock has begun, but has a long time to go.

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