Historical Energy Price Shocks and their Effects on the Economy

The purpose of this paper is to identify the changes in the impact of energy shocks on economic activity at different phases of economic development – with an interest in assessing if the economy’s vulnerability and resilience to shocks improved. Using data on the United Kingdom over the last three hundred years, the paper replicates a method introduced by Kilian (2008) to disentangle supply, demand and speculative shocks. Once the shocks were identified, their influence on energy prices and GDP was tested using an 80-year moving average. The impact of supply shocks on GDP increased in the eighteenth century, fell to zero and then increased again during the second half of the twentieth century. The impact of aggregated demand shocks was relatively constant until the 1840s, dropped to zero and, then, increased throughout the twentieth century, peaking at the beginning of the twenty-first century – as these aggregate demand shocks have been generated by international (rather than domestic) energy markets. This suggests greater resilience with the economy’s transition from biomass to coal, but possibly greater vulnerability with the transition to oil. However, because of a trend of decreasing shock magnitudes, GDP has been less affected by energy shocks since the mid-twentieth century, creating an illusion of declining vulnerability.