Economy · July 7, 2022

Oil prices began to rise as Biden began his war on fossil fuels

A reader writes:

I estimate (I don’t think so) that much of today’s inflation is due to environmental policies, particularly the war on fossil fuels.

Aside from providing no documentation on the allegation, I note that oil prices began to rise prior to Biden’s election. They rose after Biden’s election, although it should be noted that the 10-year-3-month Treasury spread has also started to rise, presumably Not because of the war on fossil fuels, but rather because expectations of economic growth had risen. We can see the co-evolution of oil prices (which are determined in global markets) and the 10-year-3-month spread in Figure 1.

Figure 1: Oil price, WTI, $ / bbl (blue, left-hand scale) and 10-year-3-month Treasury spread,% (light brown, right-hand scale). NBER has defined recession dates shaded in gray. Blue dashed line in elections, blue line in Georgia special elections and red dashed line in the enlarged Russian invasion of Ukraine. Oil price is FRED DCOILWTICO series, spread calculated using FRED DGS10 and DGS3MO series. Source: VIA, Tesoro via FRED, NBER and author’s calculations.

Oil prices actually started to rise with the end of the recession, with the low dated at April 2020.

The reader might also argue that the fluctuations in oil prices since November 2020 are due to an ongoing war on fossil fuels; I would tend to argue that macroeconomic fluctuations, supply decisions by low marginal cost producers (for example, Saudi Arabia) and expectations drive the temporal change in oil prices.

The argument that the war on fossil fuels led to inflation must mean that primary inflation in many countries has increased due to the US war on fossil fuels. Conceivable (more or less), but I must confess that I don’t see the transmission mechanism.

Figure 2: CPI inflation year over year for the US (black), euro area (HICP) (light brown), UK (green), Canada (red), Australia (pink), in%. The NBER has defined peak-to-low recession dates for the faded gray of the United States. Source: BLS via FRED, European Commission via FRED, Canada via Statistics Canada, Australia via FRED / OECD MEI, NBER and author’s calculations.

Further analysis by this particular reader, here. Since this reader does not believe in the usefulness of future data, I have not included future data; the data on the price of oil are spot on. This reader also accused me of hiding the raw data and mislabeling the data; so I provided the FRED mnemonics for Figure 1. Connections for CPI data are available upon request.