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

A reader writes:

I estimate (don’t kinda think) that a large portion of today’s inflation is due to environmental policies, in particular the war on fossil fuels.

Aside from provision of absolutely no documentation of the allegation, I note that oil prices started rising before Biden’s election. They did rise upon Biden’s election, although one should note that the 10yr-3mo Treasury spread also started rising, 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 10yr-3mo term spread in Figure 1.

Figure 1: Price of oil, WTI, $/bbl (blue, left scale), and 10yr-3mo Treasury spread, % (tan, right scale). NBER defined recession dates shaded gray. Sky blue dashed line at election, blue line at Georgia special election, and red dashed line at expanded Russian invasion of Ukraine. Oil price is FRED series DCOILWTICO, spread calculated using FRED series DGS10 and DGS3MO. Source: EIA, Treasury via FRED, NBER, and author’s calculations. 

Oil prices actually started rising with the end of the recession, with the trough dated at April 2020.

The reader might also argue that the gyrations in oil prices since November 2020 have been due to an ongoing war on fossil fuels; I would tend to land on the side that macroeconomic fluctuations, supply decisions by the low-marginal cost producers (e.g., Saudi Arabia), and expectations drive the time variation in oil prices.

The argument that the war on fossil fuels drove inflation must mean that headline inflation across many countries has risen due to the US war on fossil fuels. Plausible, but I must confess I don’t see the transmission mechanism.

Figure 2: Year-on-year CPI inflation for US (black), Euro area (HICP) (tan), UK (green), Canada (red), Australia (pink), in %. NBER defined peak-to-trough recession dates for US shaded gray. 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. Since this reader does not believe in the usefulness of futures data, I have not included future data; the oil price data are spot. This reader has also accused me of hiding the raw data and mislabeling data; hence I have provided the FRED mnemonics for Figure 1. Links for the CPI data are available upon request.