This Time Is Different: The potential for an energy recession could have an effect equivalent to $225 per barrel of oil.

• Author: Verleger, Jr., Philip K.

Recently, we have seen unprecedented rises in coal and natural gas prices along with higher oil prices. China's aggressive buying seems behind much of the increases. But the point here is not to focus on the source of the increases. Instead, what is more interesting is the macro impact. The table shows my rough estimates of global expenditures on oil, gas, and coal in 2020 and 2022, assuming prices do not decline. (Note: Several analysts who focus on energy markets argue that prices will continue to increase.) Energy accounted for 3 percent of global GDP in 2020.

The 2022 projection is based on International Energy Agency forecasts for 2022 and the continuation of end-of-September prices. For example, in Europe I assume gas prices average around $15 per MMBtu, the border prices which EIG published for end of September. Oil is assumed to average $90 per barrel and coal prices are put at $125 per tonne.

The table makes clear that "this time is different." In other words, past energy crises have been driven by rising oil prices. The increase in oil prices has been described as a tax. Economists Edward Fried and Charles Schultze wrote in 1975:

In essence, the initial impact of the oil price increase can be compared to the imposition by the producer of oil of a large excise tax, the proceeds of which were not immediately used to buy goods or services. Consumers in the importing nation paid more for energy and therefore had less to spend for other products.

With these assumptions, energy will account for approximately 9 percent of global GDP. Consumers will pay an "energy tax" of almost $6 trillion. Using basic macroeconomic multiplier analysis, an increase of $1 in taxes is generally thought to cut GDP by $1.50. Thus, one can estimate that global GDP will be cut by around $9 trillion by the increase in energy prices. For comparison, global GDP declined by $3 trillion from 2019 to 2020, making this shock three times as large as the 2020 economic shock.

Natural gas consumers in the United Kingdom may see their heating oil bills quadruple over those last winter. For some, the cost may increase by [pounds sterling]1,000. The increased expense will mean consumers have less to spend on other items. Across the United Kingdom and Europe, the increase in spending on gas and electricity will lead to reduced purchases of other items just as an increase in the value-added tax leads to reduced spending. Through economic multiplier effects, demand will...