Posted by: Josh Lehner | November 8, 2018

Oregon’s Energy Intensity and Household Spending

Energy costs can have big impacts on the economy. This has certainly been the case historically with the 1973 oil crisis and U.S. recession being a prime example. More recently we can observe the impact of gas prices on American automobile purchases. When gas is near $4 per gallon, we buy more cars, but when gas is $2 or $3 per gallon, we buy more trucks and SUVs. Furthermore, we know energy spending is a larger share of low and moderate income household budgets. When prices are higher, households have less money to spend on all other goods and services (or to save) given they need to put gas in the tank to get the kids to school, drive to work, and the like. As such, whenever there are big swings in energy costs, the question is what impact will that have on the U.S. economy, and then how will that impact the Oregon economy as well.

This was a big discussion four years ago after oil prices crashed, and again this year as oil rose back up to around $70 per barrel (it is now back down to around $60 per barrel). Well, the standard story our office tells is that Oregon sees a benefit when prices are low. We are not a mining or oil or gas extraction state. So low prices does not mean less local mining activity, employment, or investment, unlike in North Dakota or Texas. But local households do reap the benefits via their household budgets. They have more spending power, which should help drive higher sales for local businesses. Now, Oregon does have firms that supply the mining industry elsewhere in the country, so there are local feedbacks, they’re just more of a secondary impact.

That is all well and good but the story is a bit more complicated than this. In fact the impact of energy prices is more muted today, and even more so in Oregon than in in the past. Let’s start first with the concept of energy intensity. This measure looks at how much energy is used for every unit, or dollar of economic output. As is the case nationally, Oregon’s energy intensity has been falling for decades. We use approximately the same amount of energy today as we did back in the late 1990s. However our population and economy is significantly larger. As such our energy intensity has continued to decline.

These declines are seen across the various segments of the economy including commercial, industrial, residential, and transportation uses. There are a number of factors behind these declines which we will get to in a minute. But first, one big takeaway from this fact is that given energy use is a smaller share of the economy than before, it means swings in energy costs will have less of an impact than before. This works in both directions. In recent years it means that Oregon saw less of a benefit, or less of a boost to spending when we had low oil prices because it is a smaller slice of the economy.

Factors helping drive the decline include, but are not limited to: energy efficiency, transitioning from more energy-intensive manufacturing to less energy-intensive manufacturing, the growth in services overall in the economy including more office-based work, and simply less energy use per person or per household.

It’s this last factor that was recently part of the discussion we had with our economic advisors. Oregonians spend less money on gas and energy and also on motor vehicles and parts than the national average. This is true if we look at our spending as a share of personal income, or if we look at our average spending per household. Now, this wasn’t always the case. Back in the early and mid-2000s, Oregonians spent more on energy and automobiles than the US, for the most part, but this relative pattern has clearly shifted since.

Given we see this similar pattern in energy spending (above) and in automobiles (below) it points toward Oregonian driving behavior as being a big part of the story. It is not just the Pacific Northwest’s cheap hydropower driving lower energy spending. As discussed previously, total vehicles miles traveled in Oregon first peaked in 1999, nearly a decade before the US overall. Now, VMT has picked up in recent years and recently set a new record, but Oregon’s VMT per person remains low when compared to driving behavior across the country, and from patterns seen during the mid-80s through early-2000s.

So what do we make of all of this? In a macroeconomic sense it all points toward energy price swings having less of an impact on growth and consumer spending then we previously thought. The economic growth seen in industries and sectors that aren’t energy intensive is a big factor, as is the fact that Oregon households spend significantly less on energy and automobiles than their national counterparts. In earlier work, Joe Cortright at City Observatory calls this the “green dividend.” And if you add up the statewide spending patterns, adjust for Oregon’s larger decline in energy and auto spending, this green dividend is a big number. Against a counterfactual where our spending patterns didn’t diverge from the US in recent decades, Oregonians today spend approximately $2 billion less on energy and automobiles. Now we turn around and spend a larger portion and higher amounts on other products and services, housing included. But our patterns do differ than the nation’s, and we have seen a big shift over time.


Responses

  1. […] Source: Oregon’s Energy Intensity and Household Spending | Oregon Office of Economic Analysis […]


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