John Locke Update / Research Newsletter

Hurray for Lower Gas Prices: or so one would think

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As of this writing, the price of gasoline in the Raleigh area has reached lows of below $2.10 a gallon, and many states are seeing prices well under $2.00. Globally, in the last year, the per barrel price of oil has fallen from over $100 a barrel to about $45 with the arrow still pointing downward.

For an economy that — due to higher taxes, the costs of Obamacare, and crushing new regulations — has been struggling to actually recover from a recession that ended five and a half years ago, this is great news. And the real reason for this is not the Keynesian mantra that it "puts more money in people’s pockets" and "boosts spending," which of course it does, but because it dramatically lowers the cost of production of goods and services hard hit by the current administration’s polices cited above.

Gasoline and other petroleum-based fuels are an input into every production process everywhere, some more than others. For example, agriculture — from planting and harvesting to feeding and maintaining livestock to transporting agricultural products, sometimes from one part of the country to the other or around the world — is fuel intensive. The USDA describes agricultural production as "sensitive to energy costs" and notes that "higher energy-related production costs…generally lower agricultural output, raise prices of agricultural products, and reduce farm income." Of course, this means that the opposite is also true. Lower energy costs will result in greater output, higher farm income, and lower food prices. This is welcome news in an inflationary environment where food prices have been increasing at over twice the inflation rate in general.

This relationship between lower oil prices, increased productivity and lower prices is not just true of agriculture but of industries across the economy. And it is not simply about lower gasoline and energy costs but the cost of all petroleum based products, many of which are an integral part of production activities — plastics and chemicals immediately come to mind. The lower the costs of these inputs, the lower the costs of production across the board, the greater the increase in output and job growth, and the lower the prices for consumers.

So while the argument that people are better off because lower gas prices leave them with more to spend on other things is true as far as it goes, the fact is that those other things will also likely cost less because of the supply side effects of lower oil prices generally.

But if the only analysis of cheaper oil and gasoline that a person is exposed to comes from the mainstream media, he would think that these lower gas prices are causing nothing but misery. Suddenly, a media that, over the years, has assumed the oil industry had the power to raise prices at will and was earning exorbitant profits (which has never been true) suddenly seems to believe that as goes big oil, so goes America. CNN.com has this story titled "Cheap Oil is Killing My Job" about job loss in the industry. Included in the article is this plea to readers: "Are you worried about losing your job because of the oil meltdown? Share your story with CNNMoney!" And back in November, when the price of gas was just beginning its fall, The Washington Post lead with the headline "Why $3.00 a gallon gas is a bad sign for the global economy."

But my favorite reporting on lower gas prices comes from Fox channel 5 in New York City. The story seems to recognize that the lower prices are good for the economy, but with one small caveat, they will kill people. The headline reads "Low gas prices: good for economy, bad for road safety." The article concludes with the following:

But lower gas prices aren’t all good news for drivers, according to a recent study. A sociologist found that a $2 drop in gasoline price can actually translate into about 9,000 more road fatalities a year in the United States. Professor Guangqing Chi said when the economy does well, people tend to drive more. Studies show an association between a good economy and traffic crashes.

Who knew? Poverty and unemployment saves lives. I guess there’s a cloud surrounding every silver lining.

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Roy Cordato is Senior Economist and Resident Scholar at the John Locke Foundation. From January 2001 to March 2017, he held the position of Vice President for Research at the Locke Foundation. He also holds the title of Lecturer at… ...

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