Oil and the macroeconomy

Jim Hamilton discusses how the recent increases in the price of oil may interact with other macro-shocks such as Katrina.

My own interpretation is that energy disruptions only start to matter a great deal for the economy when utilization rates of other factors of production besides energy are observed to adjust. For example, in deciding to cancel flights, the airline is not just using less energy but also likely laying off workers. A typical pattern in the above episodes was that consumers suddenly became very apprehensive following the supply disruptions, postponing big ticket purchases such as automobiles. As automobile sales declined and workers were laid off in autos and the industries that sell to the auto makers, further cutbacks in spending by those affected led the economy into recession.
So where do we stand right now? In response to the rapid run-up in gasoline prices in August and the devastation from Katrina, the University of Michigan's index of consumer sentiment fell from 96.5 in July to 76.9 in September. Consumption spending fell 0.5% in August, with sales of many SUV's down 50% in September compared with the year earlier. And today Delphi, the largest U.S. auto parts supplier, filed for bankruptcy.