Annual Energy Outlook 2006 with Projections to 2030 - Usinfo.org

Issues in FocusTo portray the short-term dynamics of the economyas it reacts to oil price changes, Table 12 shows 5-yearaverage annual growth rates for U.S. oil prices (theimported refiners acquisition cost of crude oil), realGDP, potential GDP, and the consumer price index(CPI), as well as 5-year averages for the Federal fundsrate and unemployment rate, over the 2005-2030period. Higher oil prices in the short term feedthrough the economy and reduce aggregate expenditureson goods and services. As aggregate demand isless than aggregate supply, unemployment increases.With higher prices there would also be a tendency forinterest rates to rise. In the high price case, real GDPgrowth averages 3 percent per year over the 2005-2010 period, CPI inflation averages 2.3 percent peryear, and the average unemployment rate for the5-year period is 5 percent. In the reference case, thecomparable rates are 3.2 percent (average annual realGDP growth), 2 percent (average annual CPI inflation),and 4.8 percent (unemployment). PotentialGDP growth and the Federal funds rate are not significantlydifferent in the two cases over the 2005-2010 period. The impacts of high prices on real GDPshown in Table 12 are in agreement with the averageresults shown in Table 9.In the high price case, as unemployment increases,the Federal Reserve lowers the Federal funds ratefrom its projected level in the reference case. At thesame time, total employment costs are lower, whichtends to slow price growth in the economy. Over the2010-2015 period, even though oil prices continue togrow by 4.1 percent annually in the high price case (asopposed to declining by 0.5 percent annually in thereference case), real GDP growth is about the same inthe two cases, although it is increasing from a lowerFigure 13. GDP elasticities with respect to oil pricechanges in the high price case, 2006-20300.000-0.010-0.020-0.0302005 2010 2015 2020 2025 2030Year-by-yearPeriod averageTable 12. Economic indicators in the reference, high price, and low price cases, 2005-2030 (percent)Indicator 2005-2010 2010-2015 2015-2020 2020-2025 2025-2030 2005-2030Reference caseAverage annual growth ratesOil price -2.3 -0.5 0.9 1.3 0.8 0.0Real GDP 3.2 2.9 3.1 2.8 2.8 3.0Potential GDP 3.3 2.4 2.6 2.8 2.8 2.8Consumer price index 2.0 2.7 3.0 3.0 2.8 2.75-year averagesFederal funds rate 4.6 5.4 5.4 5.1 5.0 5.1Unemployment rate 4.8 4.7 4.4 4.6 4.9 4.7High price caseAverage annual growth ratesOil price 3.6 4.1 2.1 1.2 1.2 2.4Real GDP 3.0 2.9 3.2 2.8 2.8 2.9Potential GDP 3.2 2.4 2.7 2.8 2.8 2.8Consumer price index 2.3 2.9 2.8 2.7 2.7 2.75-year averagesFederal funds rate 4.6 5.2 4.9 4.7 4.7 4.8Unemployment rate 5.0 5.2 4.7 4.7 4.9 4.9Low price caseAverage annual growth ratesOil price -5.6 -4.8 -0.7 0.0 0.0 -2.3Real GDP 3.3 3.0 3.0 2.8 2.8 3.0Potential GDP 3.3 2.4 2.6 2.9 2.9 2.8Consumer price index 1.9 2.6 3.1 3.0 2.9 2.75-year averagesFederal funds rate 4.5 5.5 5.6 5.3 5.3 5.2Unemployment rate 4.8 4.5 4.2 4.5 4.8 4.638 Energy Information Administration / Annual Energy Outlook 2006