May 5, 2011

Energy and Recessions

The always interesting and provocative Stuart Staniford of Early Warning has a couple of blog posts exploring the relationship between rises in energy prices and recessions. To show the impact of energy prices, Staniford takes the ratio of the producer price index for fuels and overall consumer prices--a difficult calculation because it requires the use of different data series before and after 1957. The result is contained in the following graph. The black line represents the above ratio and nicely measures the relative impact of energy prices on the economy; the shaded areas represent recessions as officially counted by the National Bureau of Economic Research; and the green line shows domestic oil production. The nub of Stanford's argument is that the oil shock of 1973, coming soon after the peak in U.S domestic oil production, carries us into a new world in which oil shocks are a precipitating factor in economic recessions.

Staniford's summation is broadly consistent with the arguments of David Rosenberg and Jim Hamilton noted earlier:

Before 1973, energy prices were not terribly volatile, were generally declining, and seem to have nothing to do with recessions. After 1973, energy prices are much more volatile, and there is a strong association between energy price spikes and recessions, with all recessions having an associated spike just before or in the early stages of the recession, and only one prominent spike lacking an associated recession (that in 2005). 
The most obvious cause of the regime shift is the peaking of US domestic oil supply (the green curve on the right scale), causing a shift to the US being heavily dependent on importing oil, and therefore at the mercy of OPEC control of the global oil supply.

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