Constraints on Growth.

• Author: Verleger, P.

The macroeconomic forecasting models used by central banks, government planners, consultants, and financial institutions do not easily accommodate supply constraints on key economic inputs. For example, U.S. housing start forecasts were revised downward over 2021 due to shortages of labor, lumber, and other materials. Droughts that cut critical agricultural product supplies caused similar diversions between consensus projections and actual outcomes.

The supply squeeze on diesel fuel and its complementary product jet fuel in 2022 and 2023 will have the same depressing effect on economic growth as drought or the lack of a critical input such as lumber. A review of historical data emphasizes this point. Growing economies require increased supplies of diesel.

Demand for diesel is not price-sensitive because the fuel is an intermediate good in the economic cycle. Plant operators, truckers, ship owners, railroad operators, and electric utilities purchase diesel to provide their services to other sectors of the economy. The statistics show a GDP elasticity of one, that is, a one-to-one ratio, between economic activity and diesel consumption.

In the future, the relationship will change as hydrogen-powered and electric vehicles substitute for diesel-powered ships, trucks, and trains. Today, though, there are no substitutes. Less diesel (and jet fuel) will constrain...