Natural Gas Prices: How Big an Impact on the Economy?


ST. LOUIS — Because many manufacturing industries and, increasingly, electric utilities are heavy consumers of natural gas, it's assumed that record-high levels of natural gas prices may have significant, adverse consequences for the U.S. economy. An analysis by an economist at the Federal Reserve Bank of St. Louis, however, suggests that crude oil prices have a much larger impact.

The analysis was conducted by economist Kevin L. Kliesen, writing in the November/December issue of The Review, the Reserve Bank's bimonthly publication of economic and business issues. The publication is also available online at the St. Louis Fed's web site:

Beginning in 2002, prices of both crude oil and natural gas began to trend upward. By September of 2005, the damage from Hurricanes Katrina and Rita caused, in large part, natural gas prices to rise to record levels.

Kliesen emphasized that previous research has shown that sharply higher oil prices have preceded all but one of the post-World War II recessions.

"However," said Kliesen, "less is known about the relationship between rising natural gas prices and macroeconomic activity. This could be important, given that many manufacturing industries and electric utilities are heavy consumers of natural gas. In fact, natural gas is the second most important energy sources for the U.S. economy. As a result, there was widespread concern that these higher prices could cause a significant slowing of the economy, particularly those businesses that rely on natural gas as an energy source."

One of Kliesen's research goals was to determine whether changes in natural gas prices help to predict changes in the growth of manufacturing and aggregate output (GDP) and whether changes in gas prices matter more than changes in crude oil prices.

His analysis suggests that rising natural gas prices predict output growth in only a handful of manufacturing industries, including machinery, computers and electrical products. "Moreover, and perhaps surprisingly," said Kliesen, "higher natural gas prices do not predict slower growth for the two manufacturers that are the most-intensive users of natural gas—metals and nonmetallic mineral products."

While the results of his analysis are somewhat unexpected, Kliesen concluded that the results must be balanced against the finding that, when the analysis is extended to the macroeconomy (real GDP), increases in natural gas prices do not appear to matter as much as increases in crude oil prices.

"In terms of their effects on real GDP growth," said Kliesen, "crude oil prices are still more important."

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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