As of this writing, the price of gasoline in the Raleigh area has reached lows of less than $2 a gallon, and many states are seeing prices lower than that. Globally, in the last year, the per-barrel price of oil has fallen from more than $100 a barrel to about $45 with the arrow pointing downward.
For an economy that — due to higher taxes, the costs of Obamacare, and crushing new regulations — has struggled to recover from a recession that technically ended more than five years ago, this is great news. And the real reason for this is not the Keynesian mantra that a lower price “puts more money in people’s pockets” or “boosts spending,” which, of course, it does, but because it dramatically lowers the cost of producing goods and services hit hard by the current administration’s polices.
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 U.S. Department of Agriculture 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.”
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 in which food prices have been increasing at more than twice the inflation rate in general.
This relationship between lower oil prices, increased productivity, and lower overall prices is not only true of agriculture but also of industries across the economy. These prices affect not only gasoline and energy purchases but also the cost of all petroleum-based products, many of them 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, the fact is that those other things also are likely to cost less because of the supply-side effects of lower oil prices generally.
But a person exposed only to analysis of cheaper oil and gasoline from the mainstream media would think that these lower gas prices cause 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 (never true) suddenly seems to believe that as goes Big Oil, so goes America.
My favorite reporting on lower gas prices comes from the Fox affiliate in New York City. The story seems to recognize that 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 story 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 save lives. I guess there’s a cloud surrounding every silver lining.
Dr. Roy Cordato is vice president for research and resident scholar at the John Locke Foundation.