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Day 217: Scheduling a Recession Part 3

Mother's Little Helper portfolio was UP today +$2,763.66 (+0.36%).

Overall GAIN YTD: +$194,840.37 (+33.37%).

According to CNN Money our benchmark index, the S&P 500 is up +10.61% Year To Date.

There are as many indicators and collections of data sets that presume to predict the causes of recessions that ferreting out what’s right and wrong is a cottage industry unto itself. Instead of trying to get to a perfect answer, I’m going to offer up some potential recession igniters and we’ll take our conversation forward from there.

First up is energy. As I stated in my hypothesis, I think energy plays a vital role in triggering recessions. In fact four U.S recessions have been blamed on energy; 1973 Oil Crisis Recession, 1980 Energy Crisis Recession, 1981 Iran/Energy Crisis Recession, 1990 Gulf War Recession.

"Recessions are caused by manipulation of markets, money supply and energy."

When looking at the data related to oil and recessions I found some really interesting data. It helps to understand that the start of a new recession and energy are connected where oil prices approach peak prices and prices are increasing quickly. Makes sense, higher energy costs take money out of our pockets and slow the economy, while low oil prices are typically good for business and the economy. But I wanted to know what else was happening around those high oil prices. We don’t just stop using energy because oil is expensive. Turns out that we don’t have a great amount of loyalty to where our energy comes from. When oil is expensive coal production goes up significantly. Could this really be a trade off? Expensive oil causes a shift to coal? I really question the connection here because we can’t burn coal in our cars when oil gets too pricey. Likewise there are many industries that can’t easily shift from oil to coal. The biggest user, electricity production has been making a shift from coal to natural gas, not oil, and shifting back is simply not going to happen because the cost is too great. But if we look beyond our own borders we see in fact that when oil is expensive the world market will consume more coal until oil becomes cheaper than coal. With US electrical production converting coal fired plants to natural gas any increase in coal use has to come from overseas; predominately China. Politics aside, think about the ramifications of a return to a booming coal industry that ships the bulk of its coal to China to fuel their economy. I also think this has a lot to do with how easily coal and oil can be transported. While natural gas is more difficult to transport in large amounts, that is changing quickly with new LNG ships coming online. The graph shows that oil and coal tend to move in opposite directions while natural gas remains unaffected by either fuel source. There is then a great level of flexibility in the use of coal vs. oil but only in certain industries and by certain markets.

Graph by: Roger Andrews

In 1973 25% of the world’s electricity was produced by burning oil, today that number is less than 5%. Since we’re not going to shift back to coal fired locomotives, steam ships and coal electricity plants this flexibility in oil vs. coal is likely to fall apart. I’d say it already has.

Here’s how we have been using various fuel types since 1965.

In this next graph we see periods where oil production is high and prices are low, and we see periods of high coal production when oil prices are high. The vertical yellow bars I added to this graph to illustrate the beginning and ending of U.S. recessions.

Graph by: Roger Andrews & Clay Baker

Not every U.S. recession can be blamed on energy prices and a switch from oil to coal and vice versa, but there is a significant incidence of high oil prices and the start of recessions and declining oil prices at the end of a recession. So what factors contribute to our other recessions and do they coincide with these recessions as well. I’m working on that data and a related infographic.

Stay Tuned and Stay Invested


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