Did Oil Prices Start Rising When Biden Started His War on Fossil Fuels

BUT reader writes:

In my estimation (I don’t think so), much of today’s inflation is due to environmental politics, specifically the war on fossil fuels.

Aside from providing absolutely no documentation of the prosecution, I note that oil prices began to rise even before Biden was elected. They did rise after Biden’s election, although it should be noted that the 10-year-3-month Treasury spread has also begun to rise, presumably. No because of the war on fossil fuels, but rather because expectations of economic growth have risen. We can see the joint evolution of oil prices (which are determined in world markets) and the spread of terms from 10 years to 3 months in Figure 1.

Figure 1: WTI oil price, $/barrel (blue, left scale) and treasury bond spread for 10 years-3 months, % (yellow, right scale). Recession dates as determined by the NBER are in grey. Sky blue dotted line in elections, blue line in Georgian snap elections, and red dotted line in Russia’s extended invasion of Ukraine. The oil price corresponds to the FRED DCOILWTICO series, the spread is calculated using the FRED DGS10 and DGS3MO series. Source: EIA, Treasury via FRED, NBER and author’s calculations.

Oil prices actually began to rise with the end of the recession, and the bottom occurred in April 2020.

The reader may also object that the spikes in oil prices since November 2020 have been caused by the ongoing war on fossil fuels; I am inclined to believe that macroeconomic fluctuations, supply decisions by low marginal cost producers (such as Saudi Arabia) and expectations affect oil price fluctuations over time.

The argument that the war on fossil fuels has led to inflation must mean that overall inflation in many countries has risen because of the US war on fossil fuels. Possibly (sort of), but I must confess I don’t see a transmission mechanism.

Figure 2: Year-on-year CPI inflation for US (black), euro area (HICP) (brown), UK (green), Canada (red), Australia (pink), in %. NBER has identified peak-to-trough dates for the US shaded in grey. Source: BLS via FRED, European Commission via FRED, Canada via Statistics Canada, Australia via FRED/OECD MEI, NBER and author’s calculations.

More analysis from this particular reader, here. Because this reader does not believe in the usefulness of futures data, I have not included futures data; oil price data are spot data. This reader also accused me of hiding raw data and mislabeling data; therefore I have provided the FRED mnemonic for Figure 1. Links to CPI data are available upon request.