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The Jehoshua Novels

Real economic activity

I recently hijacked a thread started by Scott R with an article suggesting that real economic activity is better measured by energy consumption than phony economic figures.

Yesterday, Charles Hugh Smith released a followup article.

It’s Not Just Gasoline Consumption That’s Tanking, It’s All Energy.

An excerpt:

A number of readers kindly forwarded additional data sources to me as followup on last week’s entry describing sharply lower deliveries of gasoline. (Why Is Gasoline Consumption Tanking? February 10, 2012)

The basic thesis here is that petroleum consumption is a key proxy of economic activity. In periods of economic expansion, energy consumption rises. In periods of contraction, consumption levels off or declines.

This common sense correlation calls into question the Status Quo’s insistence that the U.S. economy has decoupled from the global ecoomy and is still growing. This growth will create more jobs, the story goes, and expand corporate profits which will power the stock market ever higher.

Courtesy of correspondents Bob C. and Mark W., here are links and charts of petroleum consumption, imports/exports, and electricity consumption. Let’s start with a chart of total petroleum products, which includes all products derived from petroleum (distillates, fuels, etc.) provided by Bob C. The chart shows the U.S. consumed about 21 million barrels a day (MBD) at the recent peak of economic activity 2005-07; from that peak, “product supplied” has fallen to 18 MBD. The current decline is very steep and has not bottomed.

This recent drop mirrors the decline registered in 2009 as the wheels fell off the global debt-based bubble. Those arguing that the U.S. economy is growing smartly and sustainably have to explain why petroleum consumption looks like 2009 when the economy tipped into a sharp contraction.

I would add that demand cannont exceed constraints of available supply for long as the cost of scarce products eventually decreases demand.

Demand isn’t created by what people want, it’s created by what people buy. When the citizenry can’t afford to buy, demand falls.

2 comments to Real economic activity

  • Jeff Wegerson

    figure in? Is it a demand driven or supply driven? I thought it was supply driven. And if it is supply driven could there be shifts from petroleum to natural gas driving the lack of rebound and/or fall in petroleum usage?

    Then there is this:

    “The basic thesis here is that petroleum consumption is a key proxy of economic activity. In periods of economic expansion, energy consumption rises. In periods of contraction, consumption levels off or declines.”

    Is that still true in a case where so much of the manufacturing part of the economy has been off-shored? Could there be a real economic recovery, at least of sorts, in non-manufacturing sectors that are not so energy dependent or at least can substitute natural gas?

    My assumption about the economy is that a Keynesian stimulus injection of government money, either by debt/credit or by fiat money, would eventually run up against the energy bottle-neck and that at that point real economic inflation, that is to say inflation of both prices and WAGES, would kick in to force a dial-back by the same government that caused the stimulus to begin with.

    But hey, I’m no economist and I am missing several important, I’m sure, pieces of the puzzle.

  • Don

    but I can’t help but see the disconnect between the economic news we hear and what I see and hear on the streets.

    Gas does not store well, except in the ground. Oil companies overproduced. Electricity generated from natural gas can’t be stored in any appreciable amount either.

    But natural gas can be used to extract thick oil such as that in Colorado shale or the tar sands of Alberta.

    While I failed to mention it, I think it’s a good thing that we have reduced gasoline comsumption.

    So much of what we call economic activity is simply consumption.

    I did inhale.

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