$70+/Barrel Oil, the Non-Crisis

Humans are not rational beings.  This is evidenced by how much agony there is over having to pay $500 more per year on gasoline than initially expected, against the relatively muted criticism towards real estate agents charging $10,000 to $60,000 for their services, or income tax preparation consuming over 10 hours of time per household per year (is 10 hours worth so much less than $500)? 

I have written before about why $70/barrel oil is good for America, as it will accelerate technological progress in energy.  In fact, it already has begun to do this. 

But yet another interesting thought arises.  Expensive oil affects the price of many things, as it inherently raises the cost of moving an object from one place to another.  Corporations that need to do a lot of this, such as Wal-Mart, Federal Express, or United Airlines, see their costs rise, and have to both raise their prices and trim their staffing levels. 

This seems like bad news for the US economy, until one considers the following :

Other countries also have such industries, and are also hit by higher oil prices.  Countries that many fear will overtake the United States, such as India and China, have economies even more dependent on oil than the US.  Sectors like automobiles, steel, aluminum, airlines, and concrete are actually growth industries in India and China, where the majority of people are yet to become consumers.  If half of the people who have cars today did not have cars five years ago, then the increase in gasoline costs is a much larger percentage of their income than it is for an American.  $500 a year more for gasoline actually is a lot for those who make $10,000 a year and just bought their very first car.  Chinese and Indian consumer spending is much more sensitive to $70 oil than US consumer spending is. 

At the same time, US corporations such as Google, Yahoo, Goldman Sachs, Pixar, Citigroup, or Oracle are much less vulnerable to high oil prices.  Yet, these knowledge-based businesses are the ones that have created most of the new wealth in the US during the last 25 years, and are the industries in which America's dominance over the rest of the world is the largest. 

So in conclusion, high oil prices hurts some of our industries, but it hurts those industries in other countries to the same degree if not more, and the industries which are less affected by high oil prices are already the industries in which America is ridiculously far ahead of the rest of the world. 

So high oil prices actually increase the gap between the US economy and those that would seek to catch up to it.  If oil hits $100/barrel, US GDP growth may drop from 3.5% to 2%, but China's GDP growth may drop from 10% to 4%.

Food for thought...

Comments

[Badboy Recovered]

Funny thing is "environuts", who love to hate suv's, and were hoping this would be the end of them. Are finding out that suv's are actually perfect for the hybrid world, as they are the only things big enough to carry all them extra batteries! :)

More hybrid suv's are entering the market than cars. Not that people dont want hybrid cars, its just that they are so small in the first place and cant carry all the extra batteries that they need. (Unless you get rid of the trunk) Sooooo in order to make it all work, the cars need to be lighter and smaller than they were in the first place. And to top it all off they are still 30 to 40 grand lol.

Not worth it!

[usnjay]

Great article. I'm often amazed that people complain about gas that costs $2.80/gallon but willingly pay $4.00/gallon for soda.

Much of the doom-and-gloom news stories these days are thinly veiled attacks by a Democrat dominated media, but for once I don't think the media is politically motivated here. I think they know bad news sells, and sensationalist stories about "high gas prices" gets people to tune-in/buy papers.
usnjay

[KnightErrant]

The last time oil prices spiked to these levels was the Arab Oil Embargo of the 1970's. The inflation rate climbed to double digits. The resulting "stagflation" lasted for nearly a decade. Not a crisis, just a persistent, debilitating bleeding.

[Stephen J.]

I'm often amazed that people complain about gas that costs $2.80/gallon but willingly pay $4.00/gallon for soda.

Yeah, but most people don't go through 20 gallons of soda per week on a regular basis, either.

It's not just a question of absolute cost but immediate cost. When you only get paid every two weeks, a minor addition to your household bill can mean running out of ready cash three days before payday instead of just one. To a family with children, that's a hardship out of proportion to the apparent scope of the numbers.

[jeffolie]

I do not buy the argument that the US will suffer less than other countries so that is good for the US.

I view this as worse for others and bad for us.

[GK]

jeffolie,

So we are saying the same thing - that the hit to the US is less than to China or India.

The US dropping from 3.5% to 2% growth is bad, but China dropping from 10% to 4% at the same time is worse.

Plus this would reduce our trade deficit with China too..

[Jake]

More superficial thinking.

If there's a silver lining to be found in the high prices, yes, we can hope that it will create more markets for alternative energy.

What you fail to acknowledge is that gas is, in effect, a regressive tax. The lack of a functional public transit system (bought and destroyed in the mid-20th century by car manufacturers) all but forces serious workers to use cars as their mode of transportation. Since the cost of gas is the same - no matter your income - those in lower income brackets suffer when the price spikes.

What's choice does the lower-middle class, who can sometimes barely afford their bills, have? Don't go to work or have your bills pushed over the edge by the cost of gas.

Just because it's not a crisis in your ivory tower doesn't mean it's not a real crisis for many Americans.

[GK]

Jake,

Er... did you even read the article?

You start out with personal insults and then glorify socialism, talking about public transportation in a manner that would make Lenin proud.

The point of the article is that the US economy is better suited to absorb the shocks of high oil prices than Europe, China or India, due to a larger portion of our economy comprising of knowledge-based businesses that are not as sensitive to oil.

Plus, lower-middle class workers in the US are less vulnerable than their counterparts in other countries, as they pay less of their income in oil, AS ALREADY DISCUSSED IN THE ARTICLE.

For someone who seems so convinced that you are a 'great thinker', it is funny that you don't even read the article that is right in front of you. All your criticism is in relation to utopian standards, rather than the real world.

[Jake]

I did not read all the links you cited: I read your commentary, which was titled and argued that this is a "non-crisis". You were trivializing the impact on everyday Americans, a group you're clearly disconnected from.

"You start out with personal insults and then glorify socialism, talking about public transportation in a manner that would make Lenin proud."

Lenin would also be proud of the nice weather we had yesterday. So what? If Lenin said the sky was blue, would you disagree?

So, since you oppose public transportation, is it safe to say you oppose public roads? Do you believe we should privatize road construction and access?

This criticism of utopian standards is highly ironic coming from you. You're sitting on a perch lecturing about the comparative well being of our lower middle class (gee, we should be thrilled that they're better off than India's lower class), while I have friends who struggle to pay their bills when energy costs skyrocket.

I'm no socialist, but the only utopian view here is your child-like "faith" in capitalism, which seems to boil down to "my system is better than Venezuelas." They're both market systems, and as I've said before, in their purest forms, both failed market systems.

Traditional right wing "conservatism" represents an almost unwavering faith (not factual support, but pure faith) in unhindered capitalism. Modern left wing "liberalism" likes capitalism, but wants controls and safety nets placed on the system to balance its ills. In other words, you favor markets in their extreme or black and white forms. I favor true centrist solutions.

Then again, conservatism hasn't stood for small government or the elimination of social programs in years.

[GK]

Jake,

It is really quite unusual that you would be so bothered by the fact that America can weather high oil prices better than other nations. You continue to avoid the fact that the US has a massive lead in knowledge-based businesses that are not sensitive to oil - industries the sclerotic economies of Europe have made almost no progress in.

And for your friends who struggle to pay their bills when gasoline costs them an extra $15/week, I thought you leftists were quick to jump on America's low savings rate as a sign of our crude gluttony.

Along your line of thought, America is also 'bad' because people get cancer in America. Nevermind that they get cancer in other countries too (often without the availability of treatments that are accessible to Americans).

[Buddy Larsen]

Accusing someone of stereotyping is such a cliche.

[SanFranciscoJim]

The 31 percenters get more and more hateful, delusional and desperate, don't they Jake?

I didn't actually realize there were any Kool Aide drinking Bush apologists left in the wild.

Liberal "Smasher" the Troll, I salute you!

[Ymarsakar]

People kept complaining Bush didn't ask the American people to "sacrifice" for the war.... well guess what, the American people aren't willing to sacrifice buying computer games, xboxes, CDs, and entertainment drinks. Instead, they complain and whine about oil going up.

People perhaps might want to get some perspective and understand that Bush can lead a horse to water, but Bush can't make the horse drink.

[GK]

Yamsakar,

Right you are. If Americans today could make even 10% of the sacrifices that Americans made in WWII, the WoT would be won in two months.

That the WoT is even occuring is more a sign of America's unwillingness to really fight hard than anything else.

[Thomas]

It's absolutely absurd to say Americans have been asked to make no sacrifices for this WoT, as someone called it. I won't get too deep into civil liberites, right to privacy, or the deplorable back door draft, but I'm sure we're all aware they exist. Additionally, comaring the imapct of any economic change at the comsumer level to other countries is equally absurd. Ask any economist, there is no one-to-one comparison for such things. Finally, saying the WoT could be over in two months (even under the best set of circumstances) illustrates true ignorance. The mass consenus right now is somewhere between 30 and 70 years (not the war in Iraq, the grander, more abstract WoT) if we ever see an end.

[GK]

Thomas,

The WoT could certainly be over in just two months, if the US applied overwhelming (conventional) force, AND if 90% of the US population were heavily committed to winning.

That is for sure.

And there is no 'back door draft' except in your delusional mind. Plus, no one buys your 5-year old 'loss of civil liberties' garbage. What specific civil liberties have you lost, that you had back in 1999?