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Transportation Technology R & D Center > Argonne Economist Predicts Gas Price Bump and Following Recession: Part 1 by Evelyn Brown While swiftly rising prices at the gasoline pump caught motorists off guard in summer 2000, Argonne transportation economist Dan Santini was waiting for it. Chicago area consumers, who saw gas prices spike at over the $2-a-gallon mark in late 2000, know who was accurate, and The Economist later admitted its error.
Center for Transportation Research, is now waiting to see if the proverbial other shoe -- a recession -- drops, especially after another price spike in the spring of 2001. Argonne economist Dan Santini's 5% gap is determined by tracking the three-year average of the rate of change of US petroleum products supplied minus the rate of change of US crude oil prices. He sees this consumer price shock through an economist's eyes. "It is fundamental supply and demand - with a twist," he explained. "For an oil price shock to occur there has to be a divergent rate of change in US consumption and production for a period of years, sort of like pressure building up. And then, the probability of a price shock goes way up," Santini said. "If the difference is positive, prices will rise, and vice versa." Santini studies the reaction of the transportation sector -- primarily changes in vehicle sales in response to gas prices -- as a key cause of recession. Using historical trends from the late 19th Century to the present, he developed a model to predict recessions. "My model shows that recessions tend to follow sharp oil price increases by one year," he said, "and if there is going to be a recession this time, it should be in late 2001." Santini's studies of the simultaneous roles of money and "real" oil prices - prices adjusted for inflation -- for the 20th Century show an inverse statistical link between oil price shocks and fluctuations in the growth rate of the money supply. "The money supply usually gets the exclusive blame for recessions," Santini said. But the transportation sector, which is 10% of the economy, plays a big role. Fuel prices are the primary cause, but consumer reactions to technology and regulations also weigh in. "I looked for other causes for recessions using all of the available major consumer and producer price series and for relationships with trade flows and government expenditures, and found none," Santini said. Model Beginnings The gas lines and rationing of the late 1970s caught Santini's attention along with other Americans. "I eventually wanted to be able to predict the causes of the shocks," Santini said. "By predicting and understanding these price shocks, we can work to eliminate them if possible." Santini studied the rapid oil price changes that occurred in 1973-74 and 1978-81. These price shocks contributed to far sharper drops in motor vehicle sales than for other products, and recessions followed. He then searched the United States historical statistics and found that gaps between oil demand and production of 5% or more had occurred throughout the 20th century and had affected the economy. The first oil price shock where the gap was clear and which was accompanied by a noticeably sharp increase in imports (from Mexico) peaked in 1920 and was followed by a recession in 1921.
reference list of publications on Santini's 19th and 20th Century investigations is available.. The 5% Gap As his primary indicator of a likely oil price shock, Santini computes the rate of change of US petroleum products supplied averaged over a three-year period and subtracts the average rate of change of US crude oil produced for the same period. A 5% gap points toward a sharp change or price shock, with the sign -- positive or negative -- of the gap predicting the direction of the oil price change. The three-year average allows for fluctuations such as unseasonable weather or short-term infrastructure problems. The indicator alerts Santini to track national and global trends to decide whether or not to issue a prediction. "In principle, this indicator should be less appropriate now than years ago," Santini said, "since the United States' use of oil is a much smaller part of the world total, and oil prices are set in a world market. Perhaps the reason the indicator may still be working is because this country is still the world's leading oil consumer." The United States is the world's third largest producer, but the 58 million barrels produced here daily supplies less than half of the petroleum products that the nation uses. He has accurately predicted two other sharp oil price shocks - in 1985 (a sharp price drop) and in 1989. Given the 1989-90 oil price shock, there was a 19% decline in annual motor vehicle production from 1989-91, and a recession in the winter of 1990-91. In contrast, the economic slump that had followed the oil price collapse in 1986 was very quick and was confined to the oil-patch region -- especially Louisiana and Texas. US producers decided it was too costly to pump oil and to continue exploration, so they sharply curtailed operations. Unemployment increases and economic problems were confined to the oil patch, while motor vehicle sales and the rest of the economy continued to grow steadily. Santini had expected the severity of the effects of that oil price collapse on the oil industry -- much more important in real dollar terms then -- to be enough to cause a recession. Still, other economists later puzzled over why there had been no boom.
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