Monday, January 27, 2020

Economics: Why Fracking Made America Recession-Proof

 (Drivebycuriosity) - It`s now 11 years since the US suffered a recession - and there is no new recession around the corner. The long economic expansion reminds of the period from 1982 through 1999. There was just one short mild recession in the year 1991 - caused by spiking oil prices as a result of the first Iraq war. This is a sharp contrast to the period 2001 through 2009 which was plagued by spiking & volatile oil prices and 2 ugly recessions (charts below).







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It appears that periods with cheap oil are prosperous, periods with expensive & volatile oil (like the 1970s and the 2000s) are not.  "Rapid increases in the price of oil have preceded almost all U.S. recessions" ( marginalrevolution  the article has a link to a study by Prof. Hamilton). You can see the relation between oil & recessions in the charts below (the dark columns show the recession years).

The causal relation between oil and recessions can be explained easily. Americans depend on gasoline. Many live in suburbs and in the hinterland and they need to drive a lot to go to work, to shop & to spend leisure time. High gas prices curb their available income. It is not surprising that high gas prices constrain consumer spending, the engine of the US economy. "Oil prices played a role in eventually bursting the US subprime bubble....In 2003, the average suburban household spent $1,422 a year on gasoline, which rose to $3,196 in 2008" (oilprice). "Rising household energy prices constrained household budgets and increased mortgage delinquency rates" (oilprice). Low income suburban homeowners suffered most from the rising gas prices. 
 


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But around the year 2012 happened a fundamental change. In the US fracking took off and raised oil production sharply (chart below). This caused a sharp drop of oil prices and reduced their volatility (charts above). Today oil costs about half the price from 2012.








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Fracking also expanded the supply of natural gas and send natural gas prices tumbling (chart below).


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Relatively cheap energy fosters the economy because consumers spend less for driving & heating and companies have lower costs. Tame energy prices also keep inflation at bay because they are components of the consumer price index and the transportation costs influence the prices of bulky goods like food, furniture, building material and more. Therefore the Federal Reserve does not need to hike interest rates sharply to break an inflation mentality which could cause a recession.

The data make it clear that fracking reduced America´s dependency from unreliable oil producers like Russia, Venezuela, Opec & the Middle East region. Fracking also reduced energy costs and the volatility of gas and oil prices & curbs inflation. This way fracking eliminated the known causes for a recession. Fracking made America (almost) recession-proof.

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