Estimated Effect of Lower Energy Prices on Inflation

The current growth in domestic oil production will mean, short-term, a decline in energy prices. In the chart below the impact, on the core CPI inflation index, of this energy sector decline can be seen via Capital Economics forecasts.

I must hasten to add, however, the CE forecasts do not take into account the eventual decrease in the desire to hold cash balances which will act as a countervailing force to downward pressure on CPI as a result of increases in energy productivity.

Also, note well that even after taking into account the downward pressure on prices because of the energy boom, CE is still forecasting that price inflation by the end of 2016 will be significantly above the Fed's "target" inflation rate.

They are correct that price inflation will intensify even with the gains in energy productivity, however, it is likely to intensify sooner than CE is forecasting and the climb is likely to be much stronger.

‘Saudi Texas’ and the OIl Shale Boom

(via Mark Perry)

Will the US Oil Boom Survive Even with Falling Oil Prices?

Joe Nocera at NYT:

Since 2008, says Bernard Weinstein, an energy expert at Southern Methodist University, oil production in the United States is up 60 percent. That’s an additional three million barrels a day. Within a few years, predicts Morse, America will overtake Russia and Saudi Arabia and become the world’s largest oil producer.

What’s more, according to another article Morse wrote, this one for Foreign Affairs magazine, “the costs of finding and producing oil and gas in shale and tight rock formations are steadily going down and will drop even more in the years to come.” In other words, the American energy industry might well be able to withstand further price drops easier than OPEC members.