Oil shocks and recessions

Here I provide some more background on the relation between oil price increases and economic recessions.

When I first began working on my Ph.D. dissertation in 1980, I was intrigued by the fact that the oil embargo of 1973-74 and the collapse in Iranian oil production after the revolution in 1978 were both followed by global recessions. But when I called attention to the fact there had been a sharp increase in the price of oil prior to 6 of the 7 postwar U.S. recessions up to that point, the general response was one of skepticism.

By the time I was presenting evidence of this relation at various seminars in 1981-82, the Iran-Iraq War had produced yet another shock to world oil markets and the NBER declared that the U.S. experienced a new recession immediately on the heels of the previous downturn, meaning that the evidence had now become that 7 out of 8 recessions had followed oil price increases. That research was subsequently published in the Journal of Political Economy in 1983 and the Energy Journal in 1985. My ideas about how this relationship might be explained by disruptive changes in the composition of spending appeared in the Journal of Political Economy in 1988.

We received some more evidence on this relationship when Saddam Hussein invaded Kuwait in August 1990, causing oil prices once again to double and coinciding with the 9th postwar recession. The price of oil also shot up before the 2001 recession. Add in the conjunction of the oil shock of 2007-08 with our current economic pickle, and my count is now up to 10 out of 11.

For the record, my position has never been that oil prices were the sole cause of all of these recessions. But the evidence persuaded me that oil must have been a contributing factor in at least some postwar recessions.

Given my long interest in this area, the Brookings Institution approached me about the possibility of writing a paper on the causes and consequences of the oil shock of 2007-08. In that paper I compared what happened last year with what we’d seen in the many previous episodes. I presented those findings at a Brookings conference earlier this month, and described some of the results for Econbrowser readers here and here.

One of the things I did in that paper was to examine a number of different models of the effects of oil prices on the economy that had been developed for earlier data, and look at what those models would have predicted to happen in 2007-08. My conclusion was that most of those models held up pretty well. Using any of the estimates surveyed, the oil shock of 2007-08 was big enough to have made a material negative contribution to real GDP over the period 2007:Q4 to 2008:Q3, and the details of what happened over that period are quite consistent with the predictions.

The reason that I think this is an interesting finding is that this period– 2007:Q4 to 2008:Q3– was when the U.S. entered recession #11. The fourth quarter of 2008 saw a very dramatic deterioration in all the economic indicators, but if you focus just on the first 12 months of the recession– 2007:Q4 to 2008:Q3– things wouldn’t have had to be much better before most analysts would have said that the economy was not even in a recession prior to 2008:Q4. For example, real GDP actually grew by 0.7% between 2007:Q3 and 2008:Q3.

Dave Cohen argues that the GDP figures are too optimistic, and I agree. But whatever your preferred measure might be, it wouldn’t take much to nudge 2007:Q4-2008:Q3 into a range that’s not usually associated with recessions. For example, gross domestic income on average fell by -0.45% over 2007:Q4-2008:Q3. My paper calculated that using any of the models surveyed this would have been a positive number if there had not been the contractionary effects of the oil shock. Alternatively, a 12-month drop in total employment is sometimes used as another indicator of whether the economy is in a recession. We crossed that threshold in the summer of 2008. But if we had not shed 150,000 jobs in auto manufacturing– job losses that I think were pretty clearly tied directly to the oil price shock– employment growth would still have been positive going into the fall of 2008.



Comparison of the effects on auto industry employment of the oil shocks of 1990 and 2007-08. Graph shows cumulative change in the number of workers employed in motor vehicles and parts manufacturing in months subsequent to July 1990 (red) and July 2007 (blue).

Why does it matter whether, in the absence of the oil shock, the experience over 2007:Q4-2008:Q3 might have been a bit better in terms of such measures as GDP or employment? My answer is that the drops in overall spending that were caused by higher oil prices proved to be the knockout punch for an economy that was already wobbly. Whatever your preferred culprit might be for our current difficulties– loan default rates, falling house prices, debt burdens, or pessimistic sentiment– that measure would have had a more favorable value going into the fall of 2008 if we had experienced more favorable fundamentals in terms of income and jobs over 2007:Q4-2008:Q3. And there’s no question that more favorable fundamentals are exactly what we would have had if the price of oil had never gone over $100 a barrel.

The fact that the biggest drop in output didn’t occur until well after the oil price went up, and resulted not from the oil price itself but instead from the interaction with other factors and the dynamic forces unleashed when the overall level of economic activity began to decline, is also exactly the same pattern we saw in each of the previous recessions.

Was the oil shock of 2007-08 the sole cause of the recession? Certainly not. But did it make a material contribution? In my opinion, the answer unquestionably is yes.

You can also find a lot more discussion over at theoildrum.com ([1], [2], [3]).

 


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38 thoughts on “Oil shocks and recessions

  1. Lord

    At the time, the oil industry was saying prices were too high and only a price of $40-50 was justified by supply and demand. Considering that level has only been reached by severe recession, it is quite clear that was false. Also considering supply hasn’t increased and investment is being cut back anyway, it seems these will only become more frequent and lasting.

  2. GK

    If oil shocks can cause recessions, than low oil prices should cause recoveries.
    Yes, I have seen the papers about how low oil prices are not stimulative in the way that high oil prices are constrictive. But if we are going to use the auto-industry as a measure, the low oil prices of the past 4 months have to have a beneficial effect on consumer spending.

  3. Cathy

    Dear Professor:
    From 6 out of 7 to 10 out of 11, why it seems that policy makers have not pay any attention to this “pattern”?
    Let’s imagine:
    When the government find that oil price shoot up, they take action at once, using either monetary or fiscal policy to counteract the negative effect, is it possible that the negative multiplier effect, and consequently the recession, will be avoided?

  4. MikeR

    JDH,
    When my coworkers suggest energy stocks are “cheap”, I like to remind them of your line from “Understanding Crude Oil Prices”:
    Four years from 2008:Q1, we may have still
    expected the price of oil still to be at $115 a barrel, though we would in fact not be all
    that surprised if it turned out to be as low as $34 or as high as $391!
    In hindsight, this seems obvious, but it was written in May of 2008. By June of that year, no one would have expected $34 oil!

  5. Terry

    Agreed.
    The consumer behavioral aspects of this are all important and may not be well understood. Sort of following up on GK’s comment above, I think the consumer has demonstrated slowness (lagging) in reacting to oil price (more specically, gasoline price) changes whether up or down–and seems to be slower reacting to lower than higher prices.
    On the way up, consumers did not appear to cut back in consumption until gas prices reached $4/gallon–a clear barrier to continuing consumption patterns–up from some $2/g months earlier. Different price levels drove similar reactions in the earlier episodes you mention, but generally the same pattern.
    A key difference between last year and decades ago is that the earlier price spurts were driven by real & immediate supply disruptions resulting in not only price increases, but supply shortages. Those of us old enough recall waiting in hour-long lines at gas stations, buying on odd or even dates depending on the last digit of your license plate, and not being able (at least officially) to buy gas unless your tank was at least half empty. That all will certainly change consumption behavior well beyond the pricing issue.
    If supply disruption was the “exogenous factor” in the consumption decisions of car owners in the 1970s, I think wealth loss (sinking 401Ks & house values, massive indebtedness) and fear of if not the fact of unemployment are the external factors amplifying the behavioral change today.
    And, unlike the earlier episodes, I am less sanguine that today’s economic forces will turn around as quickly as the supply disruptions did earlier. As a result, I think oil prices will remain fairly low for some time. Moreover, we may see real changes in auto propulsion with an expanding hybrid and EV market that could suppress oil/gas demand for even much longer.
    I think it would be useful to look at these impressions more systematically to understand our current situation and prospects.

  6. Mattyoung

    I keep reviewing the trends in oil production, prices, ad consumption. I see driving reduced as oil reached peak in mid-2005 or there about, but prices continued to rise. So, superfluous shopping hit a wall in late in 2005 and early 2006. Prices continued to rise.
    Absent speculation by the producers, something in the economy was able to use oil efficiently at over a $100/barrel. Follow that thing, it seems to solve the oil constraint.

  7. John Lee

    Who can forget the prediction made in August 2008 by Goldman Sachs equity analyst Arjun Murti that crude oil prices would spike to $150-$200 per barrel before the end of 2009 due the increase in demand and shortage of supply?
    Now their commodities team led by Jeffrey Currie has adjusted that price to just $45 per barrel for 2009.
    Want to see some of the internal memos at Goldman Sachs between traders and analysts between March and September 2008 to find out what they were saying to each other…
    http://www.1440wallstreet.com/index.php/site/comments/the_other_crime_of_the_century_2008s_short_squeeze_in_oil/

  8. baychev

    You’ve done a fine job discrediting your logical thinking. Causation and correlation fallacies screaming out loud.

  9. Nick G

    I don’t understand. Is there really a large body of economic opinion out there that believes that oil prices don’t have a large impact on our economy?
    It’s certainly clear the US goverment and military don’t have any doubts. Look at our foreign policy over the last 60 years: it’s been obsessed by oil. We’re spending roughly $2T in Iraq right now, and as Alan Greenspan reminds us, it’s all about the oil.

  10. Bob_in_MA

    Lord: “At the time, the oil industry was saying prices were too high and only a price of $40-50 was justified by supply and demand. Considering that level has only been reached by severe recession, it is quite clear that was false.”
    That assumes prices have bottomed, something I seriously doubt. So many talk about this recession, and compare it to previous ones, as if it were over. I’m definitely on the other side of that bet…

  11. Echo

    Oil price increases reduce consumer purchasing power. The Fed doesn’t fully compensate for oil price increases (by letting non oil prices fall), it just keeps creating money out of thin air regardless. Member banks are totally addicted to monetized profits, and refuse to make do with smaller executive bonuses when consumers are losing ground faster due to oil increases.
    Oil shocks also force drastic changes in production, as machines that are profitable with low oil prices become unprofitable with high oil prices. So many people changing careers all at once temporarily drives up the unemployment rate. This effect is magnified as even more people have to change production over to items that oil exporting countries want to trade their oil for.

  12. KJMClark

    “If oil shocks can cause recessions, than low oil prices should cause recoveries.”
    Except these aren’t particularly low oil prices yet. Check the chart of world oil prices at the EIA website: http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm. $50/barrel is about the same price as 2005 – just three years ago. “Low” oil prices look to be back in the $20/barrel range. “Really low” prices would be the prices of the late 90s – teens per barrel.
    And to carry the Professor’s analogy one step further, the heavy-weight fighter that received the knock-out blow was really a welter-weight that gained 60 pounds of fat. The knock-out blow caused far more than a knock-out; this fighter now has a credit-crisis concussion or worse. Even if oil prices were to fall to the “low” range, it will take some time to recover. $50 per barrel is only low enough to keep the patient from dropping into a coma.

  13. Doc at the Radar Station

    JDH, I think you are correct in using hypothesis #3. It’s causal. It is information transmittal. The masses get a signal that says that something is in short supply, better be prepared for further disruption in the supply of X, etc. This would encourage hoarding behavior which of course would amplify the problem. Hoarding behavior would reduce discretionary income even further depressing aggregate demand. I don’t know if this is causal or not, but I witnessed a lot of hoarding purchases being done on credit in a panic manner. Creditors obviously would get spooked by the changes in their data and would try to restrict and lower credit lines (which they did!), further reinforcing the hoarding behaviors (something is wrong!, better get what I can while I can). I’m not sure this is a fallacy of composition that would extend to nations or not, but I suspect that Asian countries were hoarding oil and that was the primary reason for the pricing run up, speculative factors were relatively minimal.

  14. algernon

    Prima facie, I would conjecture that oil prices would rise with each credit/money supply expansion. Should there be any surprise that oil prices should peak as these credit expansions mature?
    The temporal co-incidence of peak oil prices & the end of the boom is not unrelated. But the core cause of booms & busts of the general economy–& of oil prices–is creation of money by central banks & their derivative banking systems.

  15. Ivars

    It this is true ( its rather obvious, is not it) the quest for Green economy bubble is the right one as it will reduce the effect of oil price shocks on recessions.

  16. Vicente

    If only congressmen were aware of your work… We brazilians would be exporting rivers of ethanol. Its a shame for both americans and brazilians.

  17. steve from virginia

    Briefly,

    I can understand the attention paid to the price spike leading to $147, a truly astounding sum for something that is simply burned up and wasted. Such a price over a year would mean $4.5 trillion sent to OPEC and other good global citizens like Angola and Kazakhstan. This is completely unsustainable as it would represent at the wellhead price 6% (more or less) of world GDP and would be magnified down the processing/consuming chain leading to a much greater – and even less sustainable hemorrhage of global GDP.

    The question is rather not what was the effect of the $147 price but at what price does the economic system break down. Consider that two conditions exist that did not during the 1970’s and 80’s. One is very easy credit for a very long time and second is the rise to dominance of structured finance as a means to amplify credit creation – and also remove constraints on production as surpluses of just about anything … could be hedged.

    Consider that during the period from 1990 to 2002, the yearly average price for crude oil was $21 and change a barrel and from 2003 onward the average was over $42 a barrel. Current average for this year is likely to be over $42 and some prognosticators have put prices over $50 a the end of this year.

    NetZero poll of business conditions

    Also:

    Chart at Economic Undertow

    Consider that our crisis is centered around the private sector credit creation; there is little or none; the breakdown of credit prior to 2007 was an outgrowth of Federal Reserve Funds rate increases as a response to oil price increases beginning in 2002. The entire article is here:

    Further Evidence of the Influence of Energy on the U.S. Economy/a>

    Increased interest rates intercept the formation of fractional reserve lending at the source. So also does increases in crude oil prices, which impact at the level just below finance credit creation. Fuel prices are felt in all levels of the economy beginning with input transformation – from ores to metal, from seed to crops – basic manufacturing, oil costs translate into other primary input costs as all mining and extraction are oil- dependent. Oil sets the prices for base load electricity to power businesses, factories and transport and further downstream in the credit chain. Oil and credit are equally embedded in all goods and services, they don’t simply emerge at the consumer level.

    Consider that structured finance appears to be very vulnerable to anything other than the lowest interest rate background with very small basis risk (see LTCM) and the economy as a whole was very dependent (and probably still is) on very cheap inputs.

    So, the real question is, can $50 a barrel be sustainable? If $41 oil plus an historically moderate Funds rate hike to 5.25% can precipitate our current calamity what will $50 oil prices do?

    High oil prices act as a direct tariff on the core of credit creation. Personal income or sales taxes act upon the periphery of credit creation – more credit can be supplied to overcome the effects of higher personal income taxes, Fed rates and energy prices both act to remove a fraction from fractional reserve and energy prices do so whether actual lending takes place or not. There is, in other words, a ‘negative multiplier’ that has to be overcome by a lender to create more credit to compensate for the increase in base credit, when lending takes place or base energy, all the time. In other words, $51 oil would have the same effect a 8 – 9% Funds rate.

    In 2008, there was sufficient credit available in the system to allow an oil price of $147. We appeared to be richer, credit creation momentum allowed refiners to appear richer than they really were. Refiners did not have to reallocate finance resources to pay for $147 oil. Credit in the credit pipeline allowed refiners to pay the high price for oil in the oil pipeline. When the credit ran out the oil price collapsed.

    Our current ‘Green Shoots’ rebound is a reaction to the market possibility that oil prices might fall back to a historically sustainable level of $21 barrel. There is little or no fractional credit being formed – despite trillions of dollars in bailout lending. All cash to purchase oil has to be reallocated from some other, presumably more lucrative, endeavor.

    There are two narratives to watch, One is the what happened prior to the 2008 spike, when the good times were rolling but oil prices and interest rates were heading skyward. The other narrative is the one that is unfolding around us; prices are too low to support increases in production, too low so that depletion is encouraged because of increasing consumption, prices too high to allow credit formation and a return to effective structured finance. Not a good place for us to be in …

  18. bill j

    Completely agree about the impact of energy prices on the business cycle. Not only does it such demand out of the consuming nations it hits profit margins too, raising the cost of investment relative to profit and reducing the rate of profit. The motive for and source of funds to continued accumulation.
    Likewise agree that a collapse in raw materials prices presages a recovery. While $50 is certainly not low historically it is well below what firms became accustomed to. Their cost structure will be set up for much higher prices and therefore its relative effect will be larger.

  19. DickF

    Professor,
    Figure 1 is outstanding. I have seen similar graphs before. It clearly demonstrates how destructive was the impact of Nixon taking us off of the gold standard. When the currency was stable gold was stable. Now that the currency is floating gold has no sound base and the price of one of the purest commodities, oil, gyrates with the whims of the Federal Reserve. Besides gold oil may be the most monetary of commodities. As you have noticed its price gives us advanced notice of economic hardship ahead.
    An important study would be to step back one step and determine what economic events caused oil to do what it has done. I believe you will find that fluctuations in oil has more to do with monetary conditions than any other influence.
    I believe your observations concerning oil are valid but you enter the game after the cause of fluctuations in the oil price have already done their handywork. Push back earlier in the cycle.

  20. aaron

    Terry, gasoline consumption doesn’t really drop off until ~May 08, when prices were getting near $4. But it peaked ~Oct 07. (It’s pretty flat after spring 2004).
    Diesel fuel consumption peaked late summer 07 and deline is evident ~Oct 07.
    However, Vehicle miles travelled essentially plateaued in mid-05, and decline is evident ~Oct/Nov 07.

  21. MIke99

    1) Didn’t the effect of high oil prices coincide with the Fall season? Around August? That’s when consumers in the North East remembered we have to search for a heating contract.
    This is an 8-to-1 problem:
    I burn 1 gallon of gas a day for travel.
    I burn 8 gallons of home heating oil a day in Nov, Dec, Jan, and Feb. This is how POORLY East Coast houses are built. We DEPEND upon affordable home heating oil. If oil is high price our spending Contracts Drastically to have sufficient funds for Winter.
    2) What caused the Oil Price Spike? Speculators? Yes, but too Money was searching for a SAFE PLACE from Greenspan’s Inflationary Money Supply policy’s. Oil was a safe commodity to park money while Greenspan was on his Inflation Binge.

  22. Scott Gustafson

    MIKe99 – For a very small portion of the country, home heating oil matters. For the vast majority of us it is irrelevant. If you are that dependent, fix your house.

  23. Mattyoung

    I am with Aaron, look at traffic patterns, and I follow him in dividing between personal and commercial traffic. After that I am looking at the difference between the last mile commercial and the last mile personal freight; shopping by car and online sales. I am looking for the distribution of gas usage between local and distance traffic.
    I remember when everyone in entire neighborhoods parked their cars, and a few months later traditional retailers said, “Uh Oh”

  24. Bill in MA

    If oil price spikes can tip fragile economies into recession and can make recessions worse, doesn’t it stand to reason that reducing oil consumption would have significant long term economic benefit? What if the next spike takes the price to $200/barrel, but by then we’re consuming half as much as we did in 2007? What will the value in jobs/GDP/tax dollars/etc. over then next 40 or so years if we avoid the next 3 price spikes?

  25. Barry

    “Of course, Prof. Hamilton is well aware, but to all those journalists who write about this stuff, here’s a little reminder: http://xkcd.com/552/
    Posted by: Hyun-U Sohn
    Is there some part of 10 out of 11 which you don’t understand?
    Also, if you read his article, you might have noticed that he didn’t just jump from a correlation to causality, but first ran this through a bunch of models.

  26. aaron

    Bill in MA,
    Definitely true, but the real question is how much is practical at the moment and is punishment really a good incentive?

  27. Dave Cohen

    Re: Dave Cohen argues that the GDP figures are too optimistic, and I agree. But whatever your preferred measure might be, it wouldn’t take much to nudge 2007:Q4-2008:Q3 into a range that’s not usually associated with recessions.

    Sorry, I don’t agree. This issue–the nudge–is still up in the air as far as I’m concerned. This could-should?-be revised downward.

    Re: Why does it matter whether, in the absence of the oil shock, the experience over 2007:Q4-2008:Q3 might have been a bit better in terms of such measures as GDP or employment? My answer is that the drops in overall spending that were caused by higher oil prices proved to be the knockout punch for an economy that was already wobbly.

    Right, it’s a knock-out punch. The whole situation was deteriorating rapidly anyway. So, without the oil shock we only postpone the inevitable. Employment growth (hypothetically without losses in the auto industry) or any other measure was going nowhere fast.

    The big banks/investment houses (like Lehman) fall apart in 2008:Q3 or within a couple quarters after that regardless of the oil shock.

    The overlarge debt/stagnant wages or income situation of American workers looms large over all this. Once the Housing Bubble collapsed in 2006, the phony wealth is gone and it’s all over but the crying as the great Hank Williams said.

    best —

  28. jim

    Oil shock. I call it the rich getting richer off of the american taxpayers money. I was playing in the stock market at the time when the oil prices went from 45 up to 120 and looked like there was no stopping the rise. The journalists for a certain cable money network would keep saying that is was not the speculators causing the rise in price it was demand. They couldn’t have been more wrong. Not to mention the big oil companies reporting record profits.

  29. Michael E Sullivan

    This seems like you have some very strong results, but one thing is not clear — have their been any smaller but significant oil price spikes that are not associated with subsequent recessions or slowdowns. If there aren’t, then you have a fairly tight correlation going, one that ought to be taken seriously.

  30. Justin S. Miller

    It is a well established fact and invariable component of any university-level Principles of Macroeconomics course that oil is a factor input to production a steep hike of whose price is likely to cause an economic downturn if not a recession. With this rarely questioned concept in mind, I would like to explore the query posed by GK on 25 April 2009 as to why, if an oil price hike can cause a recession, a easing of oil supply shouldn´t lead to a recovery. To do this in a way relevant to the times, it is important to first talk about how the oil price hike of (boreal) summer 2008 could have contributed to an even more acute economic downturn than the one caused by the financial crisis were pump prices were to have remained above USD$4/gallon.
    Allow me to start by stating the obvious: the US is a net importer whose consumption has been financed by both foreign bondholders and foreign equity investors. The contribution of US consumption to world GDP is large and, as such, the importance of these foreigners who finance US consumption is great. As a result of this condition, the US finds itself in the very tight spot of always needing to convince foreigners, be they governments, businesses or private citizens, that domestic inflation will not hurt the value of their holdings in the US. As a side note, convincing foreigners of this was an easier argument to make before the arrival on the scene of emerging markets as the US now needs to compete more fiercely for these foreign investment dollars which finance US consumption and keep US GDP growth afloat (an inconvenient twist, I know!).
    Now let´s throw oil in the equation. Oil is either literally or figuratively in everything we eat, drink, use or otherwise consume. The trucks that deliver goods to our supermarkets use oil. The drivers of these trucks consume oil in their personal vehicles and demand sufficient wages to cover their energy needs. The families of these truck drivers shop at the supermarket and buy the same figuratively-speaking oil rich products that the truck drivers themselves delivered, and so the tale of petroleum dependence carries on. A 1% increase in the price of oil ripples throughout the supermarket-truckdriver-progenyoftruckdriver tale and its consequences are magnified by a decision on the part on private consumers to be less so and the unwavering proclivity of any profit maximizing supermarket owner to pass along the greater half of the oil spike to the consumer (as would be done with a tax I might add). With what does this journey into the private lives of truck drivers leave us? Reduced consumption, weakened GDP growth and (drum roll please) inflation.
    Surprised? Of course not. Allow me, however, to state this 1/5th Ph.D.´s concern about the troubling circumstances in which the US is. US national income depends on consumption, US consumption depends on the aforementioned foreigners financing this consumption and foreigners financing US consumption is dependent upon the perceived rate of return on US holdings. When US inflation reaches a level above which foreigners begin to look elsewhere for higher real returns (perhaps due to an oil price hike and attractive returns in emerging markets), the US will have its comeuppance for its willful consumption habits.
    The impatient reader is, by now, asking him or herself how any of this relates to a drop in the price of oil being able or not to lead to an economic recovery. This quick answer is that it cannot. Oil is a unique good in that upward pressure on price can be achieved entirely on the supply side while downward pressure on price depends heavily on demand as was demonstrated by OPEC´s desperate but futile attempt to drive prices down from USD$140/barrel in summer of 2008 by opening the wellheads full throttle. Prices at the pump only dropped from USD$4/gallon due to diminished demand as a result of the financial crisis. The sad reality is that while OPEC or any other petroleum producing country with spare capacity can hurt world GDP growth olympically by cutting production, they cannot spur growth by easing it. This is to say that lower oil prices have not lessened the crisis as much as the crisis has pushed down oil prices.
    Ultimately, energy dependence on petroleum has and always will cause an uncertainty about future prices and, even if oil prices remained unchanged and inflation were unaffected by the same, this uncertainty will lead to bloated expectations about future prices and consumption, GDP and the world economy will suffer as a result.

  31. Mike99

    Residential consumption of No. 2 heating oil in 2000 was 6.7 billion gallons of which 88% or 5.5 billion gallons were consumed in the 11 Mid-Atlantic and Northeastern states.
    http://www.biodiesel.org/markets/hom/default2.asp
    Scott, there is no way to increase the “efficiency” of a home, that’s already contains insulation, by more then 10%. Unless you mean Blow it up, and build with 2*12’s.

  32. Scott Gustafson

    In 2000, US refineries processed 15.3 million BPD. That’s about 235 billion gallons of crude oil during the year. Your 5.5 billion gallons turns out to be 2.3% of the total. (Actually less because refinery output volume is a fair bit greater than input volume.)
    I live in Phoenix where cooling is the problem, not heating. I halved my cooling cost by replacing the windows, insulating the attic and installing a more efficient AC unit. I still dont have any insulation to speak of in the walls.

  33. Michael E Sullivan

    Well, Scott, if you live in the Northeast, and have a house built to normal standards from the 1950s or more recently, then “fixing your house” enough to make a big dent in your heating costs will be very expensive. When I owned a 1700sf house built to what were excellent insulation standards in 1955 (R-20 wall, R-30 ceiling), we spent an average of 4-5 gallons a day to heat it in the dead of winter. Completely rebuilding the house to super-insulated standards would have done no more than cut that in half. Even not counting sunk costs (you’d basically half to tear down the house to do it now), it’s still quite expensive to build that way if you don’t want very low light and air quality. Basically, not worth it unless oil gets much more expensive than in 2007-2008.

  34. Mark

    Well, actually, if you look qat the long-term charts, we usually have cycles switching between economic advances (i.e. wasting of cheap resources) and recessions (i.e. scarce resources, rising resource prices).
    We have entered the latter one. And it will probably last for the next one or two decades.

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