Energy Demand and the 2008 Financial Crisis

ABSTRACT

The recession that occurred in 2007-2009 is considered the worst since the Great Depression of the year 1929. The recession resulted to numerous layoffs which raised unemployment to 10% and led to numerous home foreclosures. Given that energy is a necessity in modern economies, to what extent is energy consumption "recession proof?" The purpose of this research is to determine if the recession of 2007-2009 affected the consumption of the three principal energy types in the U.S. (coal, natural gas, and liquid fuel). This study was conducted using data from the Energy Information Administration on the consumption of coal, natural gas, and liquid fuel during the pre-crisis, within-crisis, and post-crisis periods from 2004 to 2012. We estimated the growth rates during the various recession periods and conducted a t-test. The t-test was used to test if the mean consumption level of each of the three energy types were statistically different between the recession period and the other two periods. The result shows an impact of the recession on the consumption of liquid fuels.

Keywords: energy, consumption, recession, liquid fuel, coal, natural gas

Copyright© 2014 Sadiyyah Muhammad

INTRODUCTION

(A recession occurs when the economy experiences two consecutive quarters of negative growth.)

The U.S. consumption of coal is 19%,natural gas is 27%, and liquid fuel is 36%. Together they make up 82% of the amount of energy consumed in America.

  • While the housing market was suffering, increasing sectors of the economy were being affected as well as the energy sector.
  • Energy has been essential in modern economies, yet because of the financial crisis its consumption may have somehow lessened.
  • Energy investments were increasingly impacted,these investments were very vital because without them, infrastructure projects were unable to be finished.
  • Weak demand followed by low consumption was due to the inability of consumers to pay as their disposable incomes decreased.

    Copyright© 2014 Sadiyyah Muhammad

  • METHOD

    1) Monthly data on natural gas, liquid fuel, and coal consumption were obtained from the U.S. Energy Information Administration database

    2) Categorized into three periods to cover the pre-recession, recession and post- recession periods each with an equal number of 36 months

    3) Pre-Recession (Jan.2004-Dec.2006) Recession (Jan.2007-Dec.2009) Post-Recession (Jan.2010-Dec.2012)

    4) Graphs and charts were used to visually compare the trends and changes in consumption of each energy source

    5) The T-test determined if the means were statistically different or not different for the pre/in crisis and the in/post crisis periods

    6) The growth rates were estimated for the the three recession periods

    7) An indication of the effect or no effect of the recession on consumption, respectively

    The T-tests were conducted based on the following hypotheses:

  • Ho: Liquid fuel consumption is different for the pre and within crisis periods and also different for the within and post crisis periods

  • Ha: Liquid fuel consumption is not different for the pre and within crisis periods and also not different for the within and post crisis periods

  • Ho: Natural gas consumption is not different for the pre and within crisis periods and also not different for the within and post crisis periods

  • Ha: Natural gas consumption is different for the pre and within crisis periods and also different for the within and post crisis periods

  • Ho: Coal consumption is not different for the pre and within crisis periods and also not different for the within and post crisis periods

  • Ha:Coal consumption is different for the pre and within crisis periods and also different for the within and post crisis periods

  • Where Ho is the null hypothesis and Ha is the alternative hypothesis

    The t statistic was calculated using the standard formula for independent two-sample t-test given as:

  • Where S_(x_1 x_2 )is the pooled standard deviation, 1 is the pre or within period and 2 is the within and post crisis periods

  • The number of observations in each period is given by n

  • If the t_stat> t_(critical ): reject the Ho and if the t_stat< t_(critical ): do not reject Ho
    Copyright© 2014 Sadiyyah Muhammad
  • RESULTS & DISCUSSION

    Figure: 1

    Figure: 2

    Figure: 3

    Table 1: Summary Statistics

    The average natural gas consumption increased during the recession and post-recession periods, and also experienced an increase in growth rate. Even though there was a negative growth rate during the pre-recession and recession periods, the overall consumption of natural gas was trending upwards. Contrastingly, liquid fuel consumption decreased significantly throughout the periods, and the growth rate remained negative during the recession and post-recession. Liquid fuel did experience a positive growth rate during the pre-recession yet consumption tended to trend downwards during the following periods (recession, post-recession). Coal experienced a decrease in consumption for each period, resulting in a negative growth rate during the recession and post-recession. The growth rate was positive during the pre-recession however, coal's overall consumption was decreasing.

    Table 2: Differences in Energy Consumption

    Natural gas experienced a negative mean difference, and the t-test determined that there were no significant changes in consumption between the pre/in or between the in/post period. However coal and liquid fuels both experienced positive mean differences leaving liquid fuels with a significant change in consumption throughout the different periods, and coal with a consumption change between the recession and post-recession period.

    CONCLUSIONS

  • Figures show that the consumption of all three types of energy are cyclical throughout the years.
  • Natural gas and electricity consumption tend to be higher in the fall and winter seasons and lower in the spring and summer seasons.
  • Liquid fuel consumption increases from the spring through the summer and declines in the fall and winter seasons.
  • EIA reports lower road miles travelled and improved vehicle efficiency may explain the observed trends in liquid fuel consumption.
  • The t-test involving coal consumption showed to have different means between the pre-recession and recession period.
  • Liquid fuel had different means throughout the recession periods.
  • Unlike natural gas and coal consumption liquid fuel is not recession proof.
  • Further research could be conducted to examine other factors involved in contributing to the declines in consumption.

    Copyright© 2014 Sadiyyah Muhammad
  • ABOUT ME

    • My name is Sadiyyah Muhammad, my hometown is in Los, Angeles California but I reside in Georgia. I am an upcoming sophomore at Fort Valley State University studying Agricultural Economics. What I like the most about studying economics is that you are able to learn how people react when it comes to demand and supply, as well as how the flow of good and services work within markets. When agriculture is added to that concept it makes it even more interesting because there's so many factors involved in the process of agriculture, and they are important in helping our societies grow and help to keep our environment healthy such as the quality of soil and water.
    Copyright© 2014 Sadiyyah Muhammad

    Special Thanks To:

    • Keith Rutlin (Educational Programs Administrator,Center for Sustainable Energy)
    • Advisor: Dr.Vincent Amanor-Boadu (Associate Professor, Department of Agricultural Economics)
    • Mentor: Frank Nti (Graduate Research and Teaching Assistant, Department of Agricultural Economics)
    • REFERENCES

      OECD/IEA (2009).The Impact of the Financial and Economic Crisis on Global Energy Investment 1-66.Retrieved from http://www.iea.org/ebc/files/impact.pdf

      U.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov

      Copyright© 2014 Sadiyyah Muhammad
      This material is based upon work supported by the National Science Foundation Grant: REU Site: Summer Academy in Sustainable Bioenergy;NSF Award No.: SMA-1359082, awarded to Kansas State University.