Sunday, June 10, 2012

The nagging influence of energy prices

It's been a while since I have posted.  I have a few other things going on, mainly working on finishing my dissertation. I did successfully defend my topic on May 1 (!), and have an awesome committee that understands how to constrain the output in the right way. So, mea culpa, and here is the first in at least a couple of energy-related posts.

For the US economy, it is fairly widely recognized that each recession is preceded by a run up in energy prices. For the US consumer, the most relevant energy price is gasoline. The mechanism by which this price initiates the recession is the negative correlation with spending on consumer durables. Here is what has been happening in the last two years:

As gasoline prices spike, consumer durable spending decreases. And vice versa. The widely recognized soft spot in 2011Q1 is seen here as a run up in gas prices and a decrease in consumer durable spending. We seem to be seeing a similar pattern this year, though consumer durable spending appears already to be recovering. If I have any short term hope for this economy, this graph is its parents. If gasoline prices continue decreasing, PCEDG will increase and help the economy grow. And vice versa.

The mechanism operates because gasoline expenditures are very price inelastic in the short run, and consumers are budget constrained. More spending on gasoline, less on durables, and most of those are manufactured in the US, so it depresses economic performance. This is a very demand-oriented story.

And, this is probably the most fundamental short term dynamic for US growth and the November election. And it is largely out of the control of the politicians.

I will shortly update a post I did a while ago on radical energy solutions that are in the pipeline and promise to break this link between energy/gasoline prices and US economic performance. This post hints at why that break will be so important.


  1. You're assuming that gasoline prices are not controlled by the Saudis. As I understand it the Saudis are a price maker. They set the price and sell all that is demanded. Which per your analysis really means that the Saudis are the most important factor in the U.S. election.

  2. That may be the case, but I am simply making an empirical observation. Your assertion, if true, is just one part of why the end of the fossil fuel epoch should be welcomed by all except, of course, those who are in the fossil fuel business.

    I will do a post talking about what is happening in science, and invention, and business that could radically change our energy economy and end the fossil fuel era. It will sound Panglossian to those unfamiliar with the space, which is why I will do the post.

  3. If it is an import story, shouldn't we be looking at net gasoline imports? EIA has them here:

    We seem to have a much smaller level of net imports (in barrels) when prices are high, and a much bigger one when prices are low. Net imports of crude seem to have been steadily declining since 2006 - in fact I think we are now a net exporter. Not sure all the implications for your argument, but worth taking a look at.

  4. Guess the link didn't work, but EIA has the data in any case.

    1. This is important, yes, in overall aggregate demand. But since oil is essentially a one price commodity (well, Brent and WTI are currently priced differently, but doesn't negate my point), the immediate impact is on the composition of PCE, and that negative impact on PCE, especially consumer durables, empirically preceeds every post-war US recession save one, so 10 of 11. So my guess is the income effect here (less to spend on discretionary items) overwhelms the aggregate demand effect.


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