We noticed a decrease in highway traffic in my part of Southern California. I thought that this was largely due due to a decrease in construction jobs. There had been many undocumented workers and others traveling 30 or more miles to work sites.
During my youth I had the opportunity to help build a viaduct for Route 66 to pass under the Rock Island Line at $1 per hour plus overtime. We has quite a long commute. Fortunately the foreman ran a car pool. Today I often see up to 100 cars parked at sites of intensive high value Southern California agriculture - workers picking strawberries etc.

I think it would be interesting to try charting vehicle miles against energy % of GDP. I think I saw something along those lines, but not sure when or where. Fuel price, even inflation adjusted, may not represent a good measure for behavior change. I suspect that the real drivers of reduced miles may a) reduced discretionary income (because more going to energy), and b) reduced demand (which can also be caused by the inflationary effects of higher energy costs relative to income). It would also be interesting to see whether different industrial regions (across countries/economies and within) pull back on travel at similar or different levels of energy costs.

Brian

First of all, I think it's interesting that a lot of background disciplines are starting to put an energy factor into the economic calculus in the period leading up to the current crisis. Since so much of the analytic background noise is finance- oriented, the role that oil prices have played over the past few years has been pretty much swept under the rug.

I see that James Hamilton identified the 2008 leap in oil prices as a flow of funds phenomenon - and I think the flow of funds out of oil and oil- derivatives caused the price to tank. This leads to the obvious question:

What is the role of structured finance in all this and how does it intersect with energy prices besides enabling commodity price runups then collapses?

The next question is what is the relationship between energy prices and interest rates? Oil prices and interest rates have a long history together:

This is Fed data (Fed charts) with 1984 constant dollar oil prices superimposed on historical Fed Funds Target rate.

Recessions are shaded. First of all, the relationship between funds rate increases and recessions is clear. Increases in the funds rate preceded recessions in 1958, 1960. 1970, 1991, 2001 (concurrent with rising energy prices), and 2008.

Oil prices triggered 1973 recession (post- Yom Kippur War energy embargo), the 1980- and 81-83 'Double Dip' recession after the removal of the Shah of Iran and the Iran-Iraq war. Energy prices contributed to the 'Dot Com' recession then fell back. Another sharp rise in fuel prices began around 2003 during the Fed's dramatic easing of short- term rates.

This last period also coincided with the remarkable expansion of structured finance, particularly in its support of asset prices (housing, bonds and stocks). Clearly the expansion of that financing scheme has contributed mightily to the severity of our current recession; a kind of sidebar would be the failure in 1998 of the hedge fund Long Term Capital Management whose 'managed liquidation' by the Fed and other New York banks was accompanied by claims similar to those being made today of 'imminent collapse of the entire financial system'. LTCM was a forerunner of current structured finance operators such as PIMCO.

Variations on the theme of energy price- flow of funds- and interest rate dynamics appear to be a trigger for recessions, even if the linkage between causes and effects is not absolutetly predictable. There seems to be sensitivity at the intersection of these dynamics (which would make the modeling fiendishly difficult). But ... one thing seems to be emerging here is that flow- of- funds dynamic may becoming to be just as much a factor in determining the availability of useful fuel as is geology or politics.

More to come ...

An analysis by Moody's at the time said that the price drops were greatest in the distant suburbs. This is a link to a story about the report. Does anyone have a direct link to the report?

CEOs for Cities report: “Driven to the brink” May 2008
http://blog.smartgrowthamerica.org/?p=188