Nostalgia buffs, we return you to spring 2012: Everyone’s talking about TV’s “Mad Men,” Mitt Romney is fending off Rick Santorum in the Republican primaries and a gallon of gasoline costs — oof! — $4.68.
Nostalgia buffs, we return you to spring 2012: Everyone’s talking about TV’s “Mad Men,” Mitt Romney is fending off Rick Santorum in the Republican primaries and a gallon of gasoline costs — oof! — $4.68.
Remember the pain of high gas prices? How long ago it seems. But fast forward a few years and the average price of a gallon of gas now is about $1.70 nationally and dropping.
Now that we have cheap gas, we should feel a lot better than we do. While every visit to the pump produces a giddy feeling of savings, those extra dollars are not jolting the economy. Growth is anemic, consumers are cautious and markets are in the tank.
Maybe you feel it yourself: how filling up the car for $25 instead of $70 represents more a breather from managing other bills than an excuse to splurge. Economists disagree about what percentage of the savings at the pump is being spent rather than saved or used to pay down bills, but no one can dispute that the big picture looks weak and unsettled. Shouldn’t all that gas money have pumped up the economy?
John Williams, president of the Federal Reserve Bank of San Francisco, acknowledged last month that the Fed “got it wrong” on its assessment of cheap oil’s impact.
Williams said that when the U.S. imported much of its petroleum, a big drop in oil prices acted like a fat tax cut. Instead of sending money to the Middle East, cash went into the pockets of consumers who could spend it on new refrigerators or dinners out. Then, the U.S. went deeper into the energy business, fracking for oil to get the U.S. closer to energy independence. About one-quarter of the petroleum consumed by the United States is imported.
Sounds great, but the 70 percent plunge in oil prices since 2014 is killing the energy sector and putting pressure on banks that lent to it. The price of oil, the major component in gasoline, is determined by complex, global forces of supply and demand. Oil and gas companies are cutting investment, laying off workers and taking a chunk of GDP growth with them. At best, cheap oil now looks to be a wash: Any boost by consumer spending is offset by the energy recession.
Oil prices have tumbled for a number of reasons, including weakening demand from China and Saudi determination to keep pumping out supply, low prices or not. The U.S. economy is being affected, in part, because it had been feasting on a jobs-producing energy production boom here that now has been tempered.
But that boom helped pull us out of the Great Recession. And we’re still better off being more vulnerable to a world economic slowdown and less vulnerable to unpredictable conflict in the oil-producing Middle East.
It’s smart to be less dependent on foreign oil. But in a global economy, opposing forces in trade and business can balance each other in broad, unexpected ways. As Michael Levi, an energy expert at the Council on Foreign Relations, told us: “The rise in U.S. oil production didn’t eliminate the U.S. relationship with the rest of the world. It changed it.”
And that’s OK. Even if cheap gas does no more than cushion against the energy recession, consider that a positive function of the globalized economy, acting as a hedge by balancing out wins and losses.
In this case, the longer gas stays cheap, the more comfortable Americans will feel spending that savings. But oil prices won’t stay low forever. As they rise, U.S. energy companies will benefit, more people will go to work. Bottom line: The more ways the U.S. taps into the global economy, the more ways it produces for the world, the better.
— Chicago Tribune