This is the first in what I'm planning will be a series of posts discussing the contribution that the energy price spike of 2008 made to our present economic difficulties. In this first installment, I revisit a very interesting research paper on the response of consumer spending to energy price increases written by Lutz Kilian (Professor of Economics at the University of Michigan), and Paul Edelstein (Senior Economist for Decision Economics). I first brought this paper to the attention of Econbrowser readers in the spring of 2007. I thought now would be a good time to take a look at how well the equations in Edelstein and Kilian's paper can describe what we saw happen in the later part of 2007 and first half of 2008.

Edelstein and Kilian summarized the historical correlations between energy prices and economic activity in terms of

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Paulson reworks financial bailout: New targets for investment… even you can apply! Markets plummet… Bill Bonner on when stocks will be cheap enough to buy. OECD predicts global recession… Germany admits contraction has already begun. Wall Street CEOs forecast “rapid,” “deep” U.S. recession. Joel Bowman on a peculiar hissing sound emitting from the Middle East.

For an erudite debate over the Paulson doctrine, we turn to our friends at The Onion this morning:

The Money Hole.

It’s not any more complicated than that, is it?

Indeed, Paulson and company announced a TARP switcheroo yesterday. Now the Treasury’s Troubled Asset Recovery Program (TARP) is suffering a serious case of the STD “mission creep.”

Instead of purchasing troubled assets from banks, the Treasury,

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Petroleo Brasileiro SA, Brazil's state-controlled oil company, continues to drill away and is now about halfway through its offshore Carioca deposit according to Mines and Energy Minister Edison Lobao said. Carioca forms part of Brazil's new pre-salt region, which lies beneath 2,000 meters of water and as much as 4,000 meters of seabed. The pre-salt region is also home to the Tupi field, which holds an estimated 8 billion barrels of oil and is the largest Western Hemisphere oil discovery in three decades. Lobao is also quoted as saying that Betrobras will need more time to determine the size of the Carioca field, so I suppose for the time being it's just a question of "on we go with the drilling".Following up on my post about oil rigs earlier in the week, Petrobras have also announced plans to lease 146 ...