A Systems Perspective 2: Oil, Energy, and Recessions

24 Mar

A recession is defined as “a significant decline in [the] economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment, industrial production, and wholesale-retail sales.” (New Bureau of Economic Research) It’s a little vague, and I remember Bush not wanting to announce an official “recession” back in 2008. Well, it was (is) one, and here’s the related chart:

For some of my background on recession writing, view:

This will be a post about oil and energy: what I used to write about optimistically (MaPSblog) but now see the extent of our fucked-ness. Read on, dear reader. As promised, a new economics post will be up Friday. This is post 2/3 of “A Systems Perspective”: Environmental Implications of America today.

What’s different?

Energy Intensity and the Economy:

The first concept I must introduce is Energy Intensity of GDP. Production, Transport, and Consumption are usually the major factors in a life-cycle-analysis: in other words some things we use use energy directly (like, gasoline) and other things are indirect accounting (like, where that plastic was made, food miles, or [manufacturing of] direct electricity). Got it? Production, Transport, and Consumption combined make up the yearly measures of Energy Intensity of the US Economy. These economy-wide statistics are reliably measured and are available at The US Department of Energy, for convenience I’ve included the most relevant diagram: Energy intensity is declining but use increases.

Energy based on use:
What I think of this is my coffee analysis, and also organic farm life cycle analysis for GE304. [both of which are published online.] Calculating energy intensity comes down to a big table of all inputs, and a relevant conversion factor into BTu (or kcal) for each input. Direct + indirect. So you have input energy, right? The amount of energy used in production.

Energy based on trending regression: The Kaufmann Analysis
Now, imagine if I took those energy intensity numbers, measured by the EPA or Department of Energy or UN… say for coffee. The amount of energy per grain in different countries is a [regression] function of how much different types of fuel they use. This is what professor Kaufmann (at my department!)’s most famous published works says. There is a substitution effect to create real GDP, or coffee, according to him, which is a constant by type known as Energy Quality. Energy in production varies across countries, but his three factors in the country’s ratio are energy quality, mix of economic activity, and energy prices. Compare that with the bolded analysis the last paragraph!

–The difference that bothers me is that this does not lead to any justification for energy savings via sustainable technologies. Sure, those factors are important for a small producer, but they can reduce use. Energy savings must be realized in each sector to make the economy more efficient, the analysis of Kaufmann would suggest that the switch to more higher quality energy fuels is responsible for the observed decline in energy intensity. Let’s just reduce energy intensity from a use perspective :: sustainable development :: See MC adjustment table summary at end of post.–

Energy Purchases= Mainly oil.

Peak oil is a terrifying concept economically.

The phenomenon happens when existing wells cannot be justified being extracted for the price of the marginal barrel. How this works (according to AC ) at the field site is this: Oil Fields have a lot, but not all oil has the same costs of extraction. After tapping out most or ~40% of the oil which flows naturally, operators will shoot down water as a recovery process, and as oil floats .. it pushes into the rig ~58% more. Tertiary recovery involves steam injection or other tehniques (used for less than 2%). Maintenence, human costs, and transportation at this stage are more energy-intensive than the oil is worth. This is the peak. 25 years to exhaust after peak. The life-cycle of an new oil field is between a few years and a few decades after its discovery. (<a href=”AC “>AC)

The significance is Marginal Cost – the Price of oil when it is a limited resource with low demand elasticity. It’s hard to shift out of oil, but we know how to if the price increases — hybrids, drive less, carpool, reduce AC… If it increases in industry — increase plant efficiency, use sustainable plastics, reduce shipping distance, focus on internal markets.. If it increases in agriculture — initial food prices increase due to paying more for seeds, higher cost of inputs, transportation prices –> sustainable agriculture that’s local will have much less impact. The price will increase for all goods that aren’t sustainable, and those that invested earlier on will be rewarded with less dependence and a nice lower set of costs from reduced energy use.  (See chart at end of post for MC effects and reactions.)

historical increases in Oil P: The charts speak for themselves:

Grey = recession period hit in production / consumption.

Hamilton (1983)

The follow-up to Hamilton's research. Would a 2008 correlation hold?

Barsky and Kilian (2004)

Conclusions to draw from these charts:

  1. Oil price increases cause recessions (decline in Real GDP), inflation to CPI, lowered investment, lower consumption.
  2. If the graph continued, you know it you’d see a 2008 spike and recession caused by Iraq. (Crazy to think that was caused by oil, eh?)
  3. This finding is statistically significant and the correlation holds true for both Hamilton (1983) and Barksy, Kilian (2004).

Why? Because the marginal cost of things is higher! You will continue to do the necessary as a business owner, but growth is doing that one last thing. If you don’t have it, all the sectors of the economy fall into each other. Oil is the lubricant that keeps marginal cost low.

Where’s the causality! It’s energy dependence!

What’s the solution! It’s to reduce energy use as much as possible! Reducing energy use per unit of production is a good working definition of sustainable development, at least as far as peak oil’s concerned. Check out the table for an overview of post.

Table 0.o will be:
industry effects of oil p increase responses in sustainable dev’t

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4 Responses to “A Systems Perspective 2: Oil, Energy, and Recessions”

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  1. A Systems Perspective 1: Resources in Country growth « A Global Organic Mindset - March 24, 2010

    […] Be sure to stop by https://eddiemill.wordpress.com/ Continue Reading: A Systems Perspective 2 […]

  2. A Systems Perspective 3: Ecologic Economics « A Global Organic Mindset - March 26, 2010

    […] Green « A Systems Perspective 2: Oil, Energy, and Recessions […]

  3. Business …”but some are more equal than others” « A Global Organic Mindset - May 3, 2010

    […] my other works on the Economy and Environment: Part 1: Economic History link Part 2: Oil Energy Recessions link Part 3: Nature and Econ […]

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    […] works on the Economy and Environment: Part 1: Economic History link Part 2: Oil Energy Recessions link Part 3: Nature and Econ […]

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