Were Rising Energy Costs the True Cause of the Recession?
Yes, it's conventional wisdom at this point that a bursting housing bubble was the cause of the current, ongoing recession. But a primary reason that bubble may have burst was that homeowners had less money to pay their mortgages after rising costs of gasoline and electricity ate into their budgets. This is precisely what a new report published in the journal Environment Research Letters proposes. In fact, the report points out that rising energy costs have preceded every major economic crash in the US for the last half century or so. Check out this chart of the last 65 years:
The report explains:
The worst recessions of the last 65 years were preceded by declines in energy quality for oil, natural gas and coal. Energy quality is plotted using the Energy Intensity Ratio (EIR) for each fuel. Recessions are indicated by gray bars. In layman's terms, EIR measures how much profit is obtained by energy consumers relative to energy producers.The higher the EIR, the more economic value consumers (including businesses, governments and people) get from their energy.Before each of the major recessions (the gray bands), you can see the general energy value declining -- as profits decreased for American consumers, they stayed constant, or increased, for energy producers like utilities or oil companies.
The paper's author, Carey King of the University of Texas, explains the overlooked impact this has on the economy: "Many economists don't think of energy as being a limiting factor to economic growth. They think continual improvements in technology and efficiency have completely decoupled the two factors. My research is part of a growing body of evidence that says that's just not true. Energy still plays a big role."
A big enough role to cause the recession? Perhaps. King suggests that "the real estate bubble burst because individuals were forced to pay a higher and higher percentage of their income for energy -- including electricity, gasoline and heating oil -- leaving less money for their home mortgages." It's an interesting theory, and one well worth mulling over -- and it's yet another reason to seriously examine the US economy's dependence on oil (the energy source most prone to wild fluctuations). If King's thesis is correct, after all, a spike in oil prices could trigger another economic collapse down the line.