prices, rationing, time - of - day metering, or voluntary restraint, electricity prices will remain unstable and ready availability of power will be uncertain. this is a worrisome situation for californians, certainly ; and because the state comprises one - eighth of our national gdp, it should be a concern for the u. s. economic outlook as well. fortunately, the overall effects on the california economy, and on those of its neighboring states seems to have been modest, at least to date. the short - term energy problems we are experiencing for gasoline, natural gas, and electric power will be resolved, one hopes, without any further adverse impact on our economy. nonetheless, the developments of the past couple of years have brought renewed attention to the longer - run prospects for energy markets in the united states. in making any assessment of those prospects it is important to recognize the extent to which market mechanisms have helped to overcome earlier apparent limitations on resources. largely in response to past oil price increases, the energy intensity of the united states economy has been reduced by almost half from the levels of the early 1970s. much of the energy displacement was accomplished by 1985, within a few years of the peak in the real price of oil. progress in reducing energy intensity has proceeded further since then but at a lessened pace. this more modest pace should not be surprising, given the generally lower level of real oil prices that has prevailed since 1985, and which carried over into natural gas and electric power prices. what has changed dramatically in recent years is the production side of the oil and gas markets, where technological changes are taking place that are likely to make existing energy reserves stretch further while keeping long - term energy costs lower than they otherwise would have been. the development of seismic techniques and satellite surveillance to discover promising new oil reservoirs has roughly doubled the drilling success rate for new - field wildcat wells during the past decade. new techniques facilitate far deeper drilling of promising pools, especially offshore. the newer recovery innovations reportedly have raised the proportion of oil reserves eventually brought to the surface from one - third to nearly one - half in recent decades. one might expect that, as a consequence of what has been a dramatic shift away from the hit - or - miss wildcat oil and gas exploration and development of the past to more advanced technologies, the cost of developing new fields and, hence, the long - term marginal costs of new oil and gas would have declined. and, indeed, these costs have declined, but by less

few signs of acceleration. thus, the rise in underlying unit labor costs has been mainly the result of the slower growth of output per hour. at the same time, evidence of increased pricing power can be gleaned from the profit margins of nonfinancial businesses, which have continued to press higher even outside the energy sector. whether that rise in unit costs will feed into the core price level or will be absorbed by a fall in profit margins remains an open question. among the biggest surprises of the past year has been the pronounced decline in long - term interest rates on u. s. treasury securities despite a 2 - percentage - point increase in the federal funds rate. this is clearly without recent precedent. the yield on ten - year treasury notes, currently at about 4 percent, is 80 basis points less than its level of a year ago. moreover, even after the recent backup in credit risk spreads, yields for both investment - grade and less - than - investment - grade corporate bonds have declined even more than treasuries over the same period. the unusual behavior of long - term interest rates first became apparent almost a year ago. in may and june of last year, market participants were behaving as expected. with a firming of monetary policy by the federal reserve widely expected, they built large short positions in long - term debt instruments in anticipation of the increase in bond yields that has been historically associated with a rising federal funds rate. but by summer, pressures emerged in the marketplace that drove long - term rates back down. in march of this year, market participants once again bid up long - term rates, but as occurred last year, forces came into play to make those increases short lived. there remains considerable conjecture among analysts as to the nature of those market forces. that said, there can be little doubt that exceptionally low interest rates on ten - year treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding and home turnover, and especially in the steep climb in home prices. although a “ bubble ” in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels. the housing market in the united states is quite heterogeneous, and it does not have the capacity to move excesses easily from one area to another. instead, we have a collection of