Oil and The Recovery of Potential GDP

One of the striking aspects of vehicle miles traveled and airline traffic is the remarkable degree to which they parallel GDP.

As with GDP, air traffic falls during the Great Recession and fails to recover its earlier trend line.  If you use a supply-constrained oil markets model, the reason is self-evident: high oil prices are suppressing activity in the sector.  For example, the fuel bill for airlines soared from 13% of sales in the early 2000s, to 33% in 2012.  Clearly, this was passed on to customers and resulted in depressed sector activity.

Of course, oil prices have crashed, and this should lead to increased air travel.  In fact, we have a historical precedent from 1985, the last time oil prices collapsed as they have recently.    We can apply these parameters to see the expected recovery of air traffic prospectively.  Here's what it shows:

System-Wide Departing Airline Passengers    Source: Transtats, forecast from Prienga

System-Wide Departing Airline Passengers

Source: Transtats, forecast from Prienga

Air traffic recovers quickly, and is back on trend by around 2017 / 2018.  If we accept the notion of oil as the principal driver of GDP in the last few years, and air traffic as a proxy for GDP, then cheap oil should permit a rapid recovery to potential GDP in the next three years, suggesting that GDP growth might be, say, 1.5%, and conceivably 2%, above normal during that period.

In other words, there is no secular stagnation, just a lack of oil.  When oil becomes available at reasonable cost, GDP returns to its long run potential.