The Gas Price Paradox: Don't Celebrate Cheaper Oil | The Atlantic

[Jay Shah]

The Gas Price Paradox: Don't Celebrate Cheaper Oil

By Derek Thompson

Gas prices doubled their drop in the last two weeks, creating a big discount for tens of millions of drivers. Hold your applause.
If the fragile recovery is on a yo-yo, oil prices are the string. The smaller the string, the higher our growth. Post-recession GDP growth reached its height at the end of 2009, when national gas prices were about $2.70. By April 2011, gas prices expanded to $4, and the economy fell below single-digit growth. But gas inflation has receded in every month since, and GDP has steadily climbed back to 2 percent.

The top story from CNN this weekend celebrated gas prices continuing their slide. The average price of regular gasoline is $3.29 a gallon, CNN reported, "down 9 cents from two weeks earlier, and down a total of 18 cents over the past six weeks."

This is reason to celebrate, if you're looking at the pump. Not so much if you're looking at the world economy. A bit of recent history can temper the enthusiasm. Remember six months ago when voters were begging the White House to "do something!" about gas prices? They didn't do anything, because they couldn't do anything, but gas prices went down anyway. Crude oil is an international commodity whose price moves based on international supply and demand factors over which the U.S. government exerts almost no short-term influence.

What assisted in the price slide? Well, China slowed down, India slowed down, and Europe watched its weaker economies slow-walk into a depression. As a result, Americans are enjoying a 50 cent-per-gallon discount on March gas prices -- although that is still about 40 cents above 2010's average. It's coming at the price of some extremely worrying developments across the world.

Policymakers like to call for smarter "counter-cyclical" policy. In other words, if the U.S. is growing, taxes should be higher, spending should lower, and regulations should be stronger to restrain inflation and the excesses of economic exuberance. Or if the U.S. is struggling, we should cut taxes, raise spending, and suspend rules to encourage companies to take risks that might result in additional hiring.

But oil prices offer a natural counter-cyclical foil to the U.S. economy that's even stronger. The U.S. accounts for about a quarter of the world's crude oil demand. When we get on a roll, the market notices. Since the market's attention moves faster than oil suppliers, good news out of the U.S. -- all things being equal -- usually moves oil prices up. Higher oil prices might be a positive indicator of U.S. growth, but they're bad for U.S. growth.

And that's the thing about oil prices. If you mute supply factors, good news (oil prices are down!) is bad news (something going wrong with the world economy); and bad news (oil prices are up!) is good news (something's growing right).

The solution for the U.S. government might be to "counter" the counter-cyclicality of gas prices. As Dan Indiviglio suggested a few months ago, the U.S. government could institute a temporary price ceiling for average gas prices while growth and unemployment are weak. In a sentence: Washington would pay for the difference between, say, $3.50 and the natural price of a gallon of gasoline until growth exceeded 3 percent for a full year or unemployment fell below 7 percent. Just one problem: Subsidizing gasoline in a recession with billions of deficit-financed dollars is the miraculous sort of policy that would piss off environmentalists and conservatives.

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Best Regards,
Jay Shah, FRM
Expect the unexpected!!!