• 5 mins Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 1 hour OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 2 hours London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 3 hours Rosneft Signs $400M Deal With Kurdistan
  • 6 hours Kinder Morgan Warns About Trans Mountain Delays
  • 12 hours India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 17 hours Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 21 hours Russia, Saudis Team Up To Boost Fracking Tech
  • 1 day Conflicting News Spurs Doubt On Aramco IPO
  • 1 day Exxon Starts Production At New Refinery In Texas
  • 1 day Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 2 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 2 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 2 days China To Take 5% Of Rosneft’s Output In New Deal
  • 2 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 2 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 2 days VW Fails To Secure Critical Commodity For EVs
  • 2 days Enbridge Pipeline Expansion Finally Approved
  • 2 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 2 days OPEC Oil Deal Compliance Falls To 86%
  • 3 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 3 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 3 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 3 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 3 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 3 days Aramco Says No Plans To Shelve IPO
  • 6 days Trump Passes Iran Nuclear Deal Back to Congress
  • 6 days Texas Shutters More Coal-Fired Plants
  • 6 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 6 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 6 days Chevron Quits Australian Deepwater Oil Exploration
  • 7 days Europe Braces For End Of Iran Nuclear Deal
  • 7 days Renewable Energy Startup Powering Native American Protest Camp
  • 7 days Husky Energy Set To Restart Pipeline
  • 7 days Russia, Morocco Sign String Of Energy And Military Deals
  • 7 days Norway Looks To Cut Some Of Its Generous Tax Breaks For EVs
  • 7 days China Set To Continue Crude Oil Buying Spree, IEA Says
  • 7 days India Needs Help To Boost Oil Production
  • 7 days Shell Buys One Of Europe’s Largest EV Charging Networks
  • 7 days Oil Throwback: BP Is Bringing Back The Amoco Brand
Alt Text

The Safest Way To Bet On The Bitcoin Boom

Often described as the backbone…

Alt Text

5 Picks For A Booming Tech Market

Technological breakthroughs like artificial intelligence…

Alt Text

Could Low Oil Prices Cause A Global Recession?

The global economy is slipping…

Dave Cohen

Dave Cohen

Dave Cohen writes the blog Decline Of The Empire. His commentaries cover a wide variety of subjects, including the American economy & macro-economics, the oil…

More Info

Why have GDP Growth and Energy Growth Separated?

Why have GDP Growth and Energy Growth Separated?

On Friday I put up the following chart, and invited readers to comment on what's wrong with it.

Energy Consumption v GDP
From Bloomberg's Sustainable Energy In America 2013 Factbook. Due to the massive government stimulus of 2009, both GDP and energy consumption grew together in 2009-2010. As the stimulus petered out, energy consumption fell off dramatically but GDP continued to grow (black circle). Click to enlarge.

For your convenience, I have circled the suspicious anomaly—economic growth has radically departed from growth in energy consumption since 2010. That trend flies in the face of everything we know about economic expansion and energy consumption—they are inseparable, at least on a global scale. I am going to assume you have read and understood my descriptions of Tim Garrett's work, which I most recently explained in Is Global Economic Growth Persistent?

The Bloomberg report chalks the divergence up to great energy efficiency in the United States. That's a happy story, but the evidence which supports it ranges from thin to imaginary. I will not argue today that the weak efficiency story is false. (I'll comment on that later this week.) Instead, it behoves us to explain the divergence in another, more satisfactory way.

In Garrett's work, the consistent relationship between economic expansion and the increasing energy consumption which supports that expansion hold on the global scale. We might expect there to be some small local exceptions to the rule in places like British Columbia or Sweden, but the sheer size of the United States economy suggests that the constant relationship between the two trends should hold (more or less) in America as well. (We have to consider trends like the offshoring of manufacturing to energing markets, which effectively moves energy consumption to other countries.)

If we look at the long chart, we see that there has been a GDP-energy dependency since 1845.

US Consumption by Source
Note the contraction in both GDP and energy consumption during the Great Depression (condensed scale on the left). Click to enlarge. Source

Related Articles: Where's the Crash?

Thus we see that the divergence between GDP and energy over the last few years is unprecedented in the United States. That departure strongly suggests that GDP is artificially inflated. And we don't have far to look to see how this has been accomplished. Consider the next two graphs.

Federal Government Spending as % of GDP
From Mike Shedlock's Government Spending as Percentage of GDP (August 28, 2012). Chart by Doug Short of Adviser Perspectives

Federal Consumption and Gross Investment
From the Washington Post's A scary graph from Goldman Sachs, Ezra Klein, the WonkBlog (February 5, 2013).

Both graphs illustrate the simple, uncontroversial conclusion that the American economy (and thus the GDP measurement) has remained highly dependent on extravagant deficit spending, even after the American Recovery and Reinvestment Act (2009) ran its course. This suggests that GDP growth in the absence of growth in energy consumption is largely a monetary phenomenon, for the government basically (outside of some defense spending)writes checks, which they make good with borrowed money. The Federal goverment does not manufacture things, it typically does not distribute goods, it does very little which is physical, as opposed to monetary. By contrast, there was a large physical ("shovel ready") component in the 2009 stimulus.

Related Articles: Egypt's Revolution Going Nowhere Fast

You might read my recent post Look At The GDP Fraud! We might go so far as to say that every GDP print in the last 2 years has been fraudulent in the sense described.

If government spending follows the dashed line in the Goldman Sachs graph—this is called "the sequester"—then we can reasonably expect GDP to follow energy consumption, as it has every year since 1845. GDP would thus decline in a most alarming way. I'll quote from Ezra Klein's post, the source of the 4th graph above—

“This is a large decline in historical context, but it is not without precedent,” [Alec] Phillips [of Goldman Sachs] continues. “This would mark the third decline in the last 50 years; the first occurred around 1970, after Vietnam War spending had peaked, followed by another around 1990 as military spending declined following the end of the Cold War and multiple rounds of spending caps were enacted.”

Even if there’s precedent for this kind of a drop, there are at least three reasons to be particularly concerned about it happening now. First, the previous periods of austerity that Phillips mentions were primarily driven by the end of major wars. That meant that a lot of that spending was not directly raising living standards in the United States, and so its absence didn’t have the kinds of consequences of, say, the sequester.

Second, this graph misses the significant tax-side austerity we’re engaged in, with the expiration of the payroll tax cut and the high-income tax increases from the fiscal cliff deal serving as an additional drag on growth. And third, the economy remains unusually weak by historical standards, and this kind of fiscal drag is going to make it that much harder to recover.

Indeed, if we look at energy consumption (in quadrillions of BTUs), we see just how weak the private American economy truly is.  It is total nonsense to use an "improved efficiency" argument to legitimize the disconnect between GDP and energy consumption in the United States. And if the arguments I've made today are correct, and the spending cuts are put in place, we can reasonably expect GDP to track energy consumption in the future, all other things being equal, just as it did during the Great Depression. In short, we can expect GDP to decline, just as those who fear "the sequester" say it will, unless a miracle occurs.

I shall comment further on "efficiency" and declining energy consumption later this week.

By. Dave Cohen

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News