Energy Prices and US Recessions (II)

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Yesterday, I explored the changes in energy prices before and during US recessions from 1926 on using the Producer Price Index for energy goods (PPIENG).  One obvious problem with that analysis is that it confounds changes in energy prices with changes in the general price level, and the latter were larger in the 1970s than they have been since.

So to address that issue, and just to illuminate the subject from a different angle, I tried dividing out the PPIENG by a measure of broad inflation.  One obvious possibility is to use the consumer price index for all goods and services exclusive of energy (since we ideally don't want energy price changes in both the numerator and the denominator).  However, that series only goes back to 1957.  So before 1957, I use the regular CPI.  Just to give you a feeling that this is reasonable, here's the two from Fred again.

So then I take the ratio of the PPIENG energy index to the broad CPI.  That basically tells us the level of energy prices relative to overall prices of goods and services in the economy, and is the black line in this picture:

I really encourage you to click on this for the big version, as it packs a ton of information. The blue bars are recessions.  You can immediately see that the trend break after 1970 that I talked about yesterday is a very real feature of the black curve.  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.