Wayne Winegarden

Today Corporate Social Responsibility is synonymous with environmental responsibility. Environmental responsibility, of course, means that a company accepts that global warming is occurring; man (particularly modern business) is the primary reason why global warming is occurring; the consequences of global warming will be disastrous for planet Earth; and consequently, businesses should be willing to sacrifice anything in the name of environmental responsibility.

From this perspective, the cap & trade regulations that Congress will be considering this Fall are a small price to pay to repent for our past environmental sins.

Before we accept our environmental flagellation, it is worth wondering just how painful the experience will be. If the pain is too high, perhaps we should consider other alternatives. Fossil fuels (oil, coal and natural gas) provide 86 percent of our current energy needs. According to the Department of Energy’s Energy Information Administration, it is not currently feasible for the alternative energy sources to significantly expand their energy contribution sufficiently in the near-term to substitute for current energy from fossil fuels. This implies that cap & trade regulations will effectively become an energy production cap – or an energy supply shock – at least in the near term.

It is not necessary to forecast the impacts that an energy supply shock will have on the U.S. economy. The U.S. economy has endured several supply-induced energy crises over the last 40 years. These have included energy supply shocks in 1974-75; 1979-81; and 1990-91; all three resulting from an "energy shock" or supply-disruption caused by Middle East tensions. These real world examples clearly illustrate that supply-induced energy shocks have adverse economic impacts.

Starting with the 1974-75 oil supply shock, oil prices increased dramatically during 1974-75 as a direct result of an interdiction in the oil supply initiated by OPEC countries. OPEC’s actions reduced total world oil supply significantly, and the price of oil rose as a result of the deprivation of oil supply. From trough to peak, total oil prices rose by over 134 percent, which had a devastating impact on the U.S. economy. The recession that followed the 1974-75 oil price shock cause the U.S. economy to shrink by 2.7 percent and the unemployment rate to increase by 3.9 percentage points. The stock market (measured by the performance of the Dow Jones Industrial Average) fell by over 35 percent from its highest daily close to its lowest daily close.

Wayne Winegarden

Wayne H. Winegarden Ph.D. is a partner in the firm Arduin, Laffer & Moore Econometrics.

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