Oil: No longer a heavyweight

Higher efficiency, a more diverse energy mix and a more prosperous nation have softened rising oil's economic punch.

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- The days of rising oil prices alone threatening to knock out the economy may be over.

At more than $93 a barrel, oil prices are at or near all-time highs, even when adjusted for inflation.

Thanks to higher efficiency, a more diverse energy mix and more money, $100 oil just doesn't matter as much in the new energy economy.

Yet the economy has so far withstood the impact of rising crude. By contrast, the last time crude prices were this high, in the early 1980s, the economy tanked.

It's not like oil no longer matters, but it's clear the the energy economy has changed dramatically. Efficiency gains, higher prices driven by demand - not supply - a more diverse energy mix and the fact that people simply make more money means that energy no longer pulls the overall economy like it used to.

"The effect is more muted now," said Chris Lafakis, an associate economist at Moody's Economy.com, an economic consultancy. "The economy is more prepared for it."

One of the most common reasons cited is that Americans, as a whole, just don't spend as much on energy as they used to.

In 1981 the country devoted nearly 14 percent of its overall gross domestic product to energy, according to the Energy Information Administration. By 2006 that number had fallen to about 9 percent.

Efficiency has played a big part in that change. Following the first oil shock of 1973, when OPEC refused to sell crude to the United States in retaliation for U.S. support for Israel in the Yom Kippur War, Congress passed laws mandating more fuel efficient appliances and cars. Industry also started buying more efficient machines.

The result: EIA data show that it takes nearly half as much energy to create one dollar of economic output today than it did in 1981, owing to efficiency gains and an economy that relies on less energy intensive industries.

"High oil prices are still a big deal, but they had more of an impact in the early '80s because we're [now] much more energy efficient," said Michael Waldron, an energy markets research analyst at Lehman Brothers.

Americans are also richer as individuals.

In 1980, the average American had to work 105 minutes to buy enough gas to drive the average car 100 miles, according to a study by David Wyss, chief economist at Standard & Poor's. By 2006, the average American needed to work only 52 minutes, thanks in part to better fuel efficiency but mostly due to higher wages.

And in 2006, Americans spent 6 percent of their disposable income on energy, according to numbers provided by EIA. In 1981, that number was 8 percent.

The nature of the recent price spike is also different.

The oil shocks of the 1970s and early 1980s were driven by suppliers - OPEC in 1973, the Iranian revolution in 1979, and the outbreak of the Iran-Iraq war in 1981.

Most analysts say the underlying factor behind the recent runup - oil has nearly quadrupled in price since 2002 - is surging demand.

People are willing to pay more for oil if they think the reasons for its rise are valid, said Moody's Lafakis. They are also more likely to think the high prices will be lasting and invest in even more fuel efficient products.

"The world economy can respond better now," said Lafakis. "It's been adjusting to it for a longer period of time."

It also helps that oil use is now confined to a smaller section of the economy, namely transportation.

But before the 1970s, nearly a quarter of the nation's electricity was produced using oil, according to EIA.

The price shocks of the '70s and '80s prompted utilities to build cheaper coal and, until recently, natural gas plants. Now oil is used to produce just a fraction of the nation's electricity.

"That's the big driver of change in energy patterns - cost," said Jonathan Cogan, a spokesman for EIA.  Top of page