Energy Prices and the Economy Stephen Brown Federal Reserve Bank of Dallas.

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Presentation transcript:

Energy Prices and the Economy Stephen Brown Federal Reserve Bank of Dallas

Refiners hurt Transportation also hurt

Petrochemical producers hurt Petrochemical users also hurt

Fertilizer producers hurt Fertilizer users also hurt

Electric utilities hurt Electricity users also hurt

Aluminum producers hurt Aluminum users also hurt

Natural gas and oil producers helped Oilfield services also helped

Oil price shocks and U.S. recessions

Overview Oil prices Natural gas prices Economic effects of higher energy prices – not a threat to recovery Differential effects by region How energy price shocks affect the economy

Why oil prices are higher

OPEC Production Near Capacity

Why oil prices are higher Strong world oil demand and loss of some production capacity has pushed OPEC close to capacity Disruption risk premium Higher tanker rates

Oil price outlook Demand Non-OPEC supply OPEC production/capacity WTI to fall toward $35 per barrel

Oil Prices Surge but Expected to Fall

Oil Prices Likely to Fall

As high as oil prices are, natural gas prices are higher

Natural Gas Prices Decouple from Oil

Oil and Natural Gas Prices Recoupling?

U.S. and Canadian natural gas sources

Natural gas prices likely to remain elevated

Natural gas price outlook Elevated relative to oil prices Likely range: $ per million Btu Most likely range: $

Estimated Economic Effects

Estimated effects of higher energy prices Assumptions: Oil prices 50 percent higher Natural gas prices 20 percent above historical relationship with crude oil prices

Estimated effects of higher energy prices U.S. GDP reduced 1.0 percent –0.85 percent from oil & natural gas together –0.15 percent from natural gas alone GDP deflator increased about 1.0 percent Slight upward pressure on short rates

Why Only Mild Economic Effects? More experience with energy price shocks –reduced adjustment costs Oil price increases moderate by historical standards Reduced energy-to-GDP ratio

Real Oil Prices Not So High

Energy-to-GDP Ratio Falling

Regional Effects

Regional Effects Uneven Energy-intensive industries most hurt Energy production helped Regions with energy-intensive industries hurt Energy-producing regions helped

Higher Oil Prices and State Economies HelpedHurt

Energy prices and U.S. economic activity Oil prices to remain elevated Natural gas prices to remain even higher A slight drag on U.S. economic activity Effects uneven across the states