There is nothing, and I mean nothing, like rising crude-oil prices to make sensible people go all wobbly in the head. Economists fail to differentiate between cause and effect. They confuse a supply shock with a shift in demand and see the outcomes as interchangeable. And they can’t see beyond the immediate negative impact on the consumer.
When rising oil prices coincide with an election year, people start spouting utter nonsense. It never changes. In fact, the script follows a predictable template:
Act I: Oil prices rise. Then they rise higher, surpassing the $100-a-barrel mark, as the threat of a potential supply disruption prompts real and speculative buying. Gas prices head toward $4 a gallon or (alternate scenario) set a record for the current month/season of the year.
Act II: Enter the politicians to blame whichever party holds the White House at the time. The media report that households are feeling the pinch, forced to choose between feeding the family and filling the tank.
Act III: Economists warn of the negative impact of higher oil prices on a fragile economy. They produce model-based estimates of the effect of every $1 increase in the price of oil on gross domestic product. Former Morgan Stanley economist Stephen Roach reminds us that “oil shocks” -- he uses the term loosely to describe any price spike, not an actual reduction in supply, the correct usage -- have a perfect track record of predicting recessions.
I counter Roach by pointing out that correlation is not causation, that in each case the Federal Reserve was braking hard to slow the economy.
Act IV: The president comes under pressure to “do something.” In the short run, this means a cosmetic release of oil from the Strategic Petroleum Reserve, an emergency facility that politicians view as a slush fund. A Senate committee chairman holds a show trial for Big Oil executives to discuss big profits and to offer his support for an excess-profits tax. Environmentalists and economists who favor a tax on carbon-based fuels go quiet.
Act V: The global threat to supply recedes, oil prices settle back to normal, and everyone files the script away for the next revival.
In the current reprise of “Crude Oil Rising,” Act IV is just beginning. Last week, Treasury Secretary Timothy Geithner acknowledged there was a “case” for releasing oil from the SPR in certain circumstances, citing the potential for supply disruptions from Iran. Economists are warning about new threats from rising oil prices.
Just once I’d like to read a story that mentions the beneficiaries of rising oil prices -- oil producers -- and the trickle-down effect on the economy. In case you haven’t noticed, the oil and gas industry has been on a hiring binge, adding 30,000 employees since December 2009, a 19.4 percent increase. Mining, of which oil and gas are a component, increased hiring by 27 percent in that time frame. The only category that came close was temporary-help services.
Newly hired workers receive paychecks -- and in many cases, benefits. Oil-industry profits are paid out as dividends to shareholders, consumers by another name. Higher prices, in turn, provide an incentive to find new sources of energy.
Even the petrodollars sent overseas come back in some form: purchases of goods and services, foreign direct investment or securities purchases.
So rising oil prices aren’t a one-way street. Unfortunately the pain and benefits aren’t contemporaneous.
In some circles, including the current administration, higher oil prices are a goal -- except not in an election year and not when prices are high to begin with. Before he became President Barack Obama’s energy secretary, Steven Chu was an advocate of higher oil prices as a means of curbing the public’s consumption of fossil fuels and increasing the viability of alternative energy.
In a September 2008 interview, Chu told the Wall Street Journal, “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.”
I suspect Chu will refrain from advocating European-style gas prices -- two or three times U.S. prices, courtesy of a hefty value-added tax -- until he returns to academia.
There’s another group that wants to make gas consumption more expensive, but for a different reason: to correct for negative externalities, or the adverse effects of an activity on those who aren’t a party to the transaction. Coal-burning power plants, for example, don’t bear the entire cost of their production; we do in the quality of the air we breathe.
Organized as the Pigou Club by Harvard’s Greg Mankiw, this group includes such free-market notables as Gary Becker, a University of Chicago Nobel laureate in economics; George Shultz, a former secretary of state; and former Fed chief Alan Greenspan, not to mention obvious supporters, such as the New York Times’ Tom Friedman and Paul Krugman.
This group goes underground during recurrent productions of “Crude Oil Rising.” Even the tree-huggers lose their affection for higher gas prices once they become a reality.
Besides, they don’t have much of a role in this drama, where all the parts have been pre-cast. Once the final curtain comes down -- once gas prices fall and the 2012 election is history -- advocates for higher gas prices can go back to peddling their ideas to a fresh audience.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.)
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