Do Energy Prices Matter? Rachel Miller Nenad Pentelic

History of Energy Oil – Use began in 19 th century – Original price: $.81 / barrel – Demand boosted by World War I – OPEC established 1960 Electricity – Used for lighting, heating, etc. – World consumption 2009: tw/h – Leading consumers Asia Pacific, US, Europe

History of Energy Natural gas Founded in 1844 near Vienna First forms was for lamps; now used industrially Traded through pipelines or liquefied natural gas

Growing concerns about energy insecurity Rapid economic growth China -10% GDP growth over last century -Energy consumption: 71% coal, 19% oil, 6% hydro India -4 th largest oil consumer -Lack of own resources- must import -40% coal, 24% oil Most reserves in unstable regions – 60% oil reserves in Middle East

What Determines Energy Prices? Unpredictability Inelastic demand curve Unpredictable world events or new reserves discoveries Rise in Prices production cuts new reserve findings Fall in Prices oversupply / lack of demand

Stock Markets, GDP, and Energy Prices Every 10% oil price increase, GDP drops by 0.5% Energy price cause recessions, but price do not cause economic booms Responses to 1% energy price increase: Response Comparison of Consumption Product Consumption Durables -.84%-.24% Vehicles -1.31%-.49% Unemployment 1.53%.36% Total Real Consumption -.30%-.08%

Consumer Responses to Energy Prices Precautionary Savings – Motivated to save b/c of likelihood of increasing prices, unemployment, etc. Reduce Consumption – Delay new purchases – Energy efficiency/awareness Discretionary Income – Less $ to spend after bills – Cutback on ‘nonessentials’- restaurants, entertainment, travel, etc

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