Productivity and Energy Cost

This chart shows GDP per hour of work by U.S. workers. It also shows U.S. expenditures for fuels as a percent of gross domestic product. GDP per hour of work is a measure of productivity. Note that throughout the 50s and 60s, productivity increased steadily. There were some actual decreases in productivity in the 70s. It grew again, at what looks like an exponential rate, from about 1995 to 2005. Following this period of accelerating increase, a lull in productivity growth began in 2005. Note that this downturn began well before most economists were talking of recession.

It appears that periods of stagnant or decreasing productivity coincide with times of escalating energy costs. And it looks as if periods of steady growth in productivity correspond to times when energy costs have been relatively low, in the range of 3.5 percent of GDP or less. Such a correlation makes sense, because virtually every economic activity in the industrialized world depends on a supply of extraneous energy, mostly fossil fuel. It’s been said that the economy today is less energy-intensive than it once was, and so is less vulnerable to increases in the cost of energy. It’s indeed true that we produce more goods and services today per unit of energy than formerly. That doesn’t make the economy less energy-dependent. The industrial economy was nearly 100% dependent on extraneous energy in the 70s and 80s, and it is nearly 100% dependent on such energy today. Arguing that a less energy-intensive economy is less vulnerable to increasing energy costs is like arguing that a person who drives a car that gets 40 mpg is less dependent on gasoline than a person who drives a car that gets 20 mpg. Both drivers are 100% dependent on gasoline if they want to drive, and if fuel costs go up too much, the product of their driving - miles traveled - will go down.