Are energy prices cyclical?

Abstract

Conventional analysis implies that energy price declines from 1981 to 1983 were caused by the world recession. The alternative view presented in this paper is that these declines arose largely in response to changes in US energy policy and were not due to the business cycle. After developing the theoretical conditions for cyclical prices in various oil and energy markets, we examine US macroeconomic data, 1947–1980, to test these competing views. We conclude that declining oil and energy prices are not a business cycle phenomenon; indeed, the evidence offers support for the reverse causation – that energy prices cause business cycles.