Friday, January 25, 2013

How High Gas Prices Kill an Economy

Many of us grumble when the price at the pump goes up, but the pinch it puts on our own pocketbooks aside, higher gasoline prices are a millstone around the neck of the economy and are often a near-death sentence for the poor.

Gail Tverberg writes a post at The Energy Collective titled Ten Reasons Why High Oil Prices Are a Problem in which she lists and explains the ramifications of high oil prices. Her piece could have been titled How High Gas Prices Kill an Economy and Devastate the Poor. Here's just one example:
It is not just oil prices that rise. The cost of food rises as well, partly because oil is used in many ways in growing and transporting food and partly because of the competition from biofuels for land, sending land prices up. The cost of shipping goods of all types rises, since oil is used in nearly all methods of transports. The cost of materials that are made from oil, such as asphalt and chemical products, also rises.

If the cost of oil rises, it tends to raise the cost of other fossil fuels. The cost of natural gas extraction tends to rise, since oil is used in natural gas drilling and in transporting water for fracking. Because of an over-supply of natural gas in the US, its sales price is temporarily less than the cost of production. This is not a sustainable situation. Higher oil costs also tend to raise the cost of transporting coal to the destination where it is used.
High oil prices mean higher prices for everything. This means people have less discretionary income to spend on restaurants, vacations, automobiles, college, homes and home repairs, etc. This means that the jobs of people working in these sectors, particularly marginal jobs most often held by the working poor, are placed at risk. As unemployment rises the government has to spend more on relief, but it's also taking in less tax revenue because there are fewer taxpayers. This means that relief programs have to be pared back. All of this means that high gas prices result in more people struggling to get food, heat, and shelter.

Liberals see higher gas prices as a good thing because they think that if the price is higher people will use less of it, and there'll be less carbon polluting the atmosphere. They're right about that, of course, but high energy costs are no way to solve the problem, if it really is a problem, of carbon emissions. Tverberg gives a good illustration from the airline industry of the ripple effect of high fuel prices. Check it out.