Low Oil Prices and Prosperity
I continue to see reports about how bad falling oil prices are for the economy -- most recently some layoffs in the steel industry were blamed on the looming drop (or crash) in oil drilling and exploration driven by substantially lower prices.
I find this exasperating, a classic seen-and-unseen type failure whose description goes back at least to the mid-19th century and Bastiat and essentially constituted most of Hazlitt's one lesson on economics. Yes, very visibly, relatively high-paid steel and oil workers are going to lose their jobs. They will have less money to spend. The oil industry will have less capital spending.
But the world will pay over a trillion dollars less this year for oil than it did last year (if current prices hold). That is a huge amount of money that can be spent on or invested in something else. Instead of just getting oil with those trillion dollars, we will still have our oil and a trillion dollars left over to spend. We may never know exactly who benefits, but those benefits are definitely there, somewhere. Just because they cannot be seen or portrayed in short visual anecdotes on the network news does not mean they don't exist.
Ugh, this is just beyond frustrating. I would have bet that at least with oil people would have understood the unseen benefit, since we get so much media reportage and general angst when gas prices go up that people would be thrilled at their going down. But I guess not.
I explained in simple terms why the world, mathematically, HAS to be better off with lower oil prices here.
Mike Powers:
Which is better: Expensive stuff and everyone has a job, or cheap stuff and we're all on the dole?
January 6, 2015, 10:30 amlelnet:
Only an idiot or a Keynesian (but I repeat myself) would argue that falling oil prices are a _cause_ of economic failure...but they do tend to be a _symptom_ of it. Of course, that's usually been because prices only fall in response to falling demand, rather than (as it seems at present) in response to cheaper supply.
The beliefs of enviro-loons notwithstanding, falling demand for energy is not a good sign. But that doesn't appear to be what's happening right now.
January 6, 2015, 10:39 amIsaac:
In the hard money and simple debt world of Bastiat, commodity prices going down is always a boon for consumers. In this world of derivatives, incredible leverage, and debt financing, sudden crashes in a commodity can have far reaching consequences. It's great to have lower prices at the pump but I worry about the financial world crumbling when another "can't lose"investment area crashes. As bonds go unpaid the dominos start to fall.
Of course if the system does crash again many will point to oil prices as being "the cause" when in fact they could just as easily be another symptom of the world economy getting worse. Like most things, crashing oil prices is a mixed bag. In a world where there wasn't a pathological addiction to credit (aka debt) the lower prices would be fantastic news. Instead I am holding my breath and waiting for the other shoe to drop.
January 6, 2015, 10:43 amMole1:
The Vanguard Industrial Securities ETF has an expense ratio of 0.12%.
January 6, 2015, 11:17 amOnlooker from Troy:
You've nailed it. The world (mostly) is addicted to debt, and govt and the powers that be have an interest in the ponzi scheme continuing forever (or as long as they're relying on it, i.e. alive, really), and thus their interest in perpetuating the "deflation is bad" meme despite all common sense to the contrary.
January 6, 2015, 11:31 amTom Murin:
These are the same folks that think there are no jobs lost when minimum wages are increased by law, or some other benefit is mandated (e.g. paid sick leave or family leave). They believe in magic. Costs increases must only come out of the profit of the 1 % types.
January 6, 2015, 11:33 ammemelo2:
It's a win-win situation for the media:
Falling oil prices are bad news and rising oil prices are also bad news. And since bad news are the best news to report on...
January 6, 2015, 11:51 amAheho:
You nailed it.
January 6, 2015, 12:32 pmAs I said in the previous post on this, never reason from a price change. If the price is dropping due to a shift in the supply curve, it's good news. If the price is dropping due to a drop in demand, due to worsening economic conditions in Europe, then it's bad news.
The change in price is not a cause. It's an effect.
awp:
Never reason from a price change. The world is not better off because of the fall in the price of oil. A straight change in price has a one to one correspondence between losers and winners.
The world is better off because we figured out how to produce more oil and gas at any given price,
then we produced more oil and gas.
Now the prices are falling because of that increased supply,
January 6, 2015, 12:49 pmbut the world is better off because there is more of an input available for us to use to produce valuable goods and services.
Stephan F:
Only left-wing statists & modern day Luddites would believe falling oil prices
January 6, 2015, 1:38 pmare a problem. The idiotic notion that falling prices of anything are the
reasons for our economic woes is complete nonsense that only a 1st grader with ADHD would believe. Yet this is all we hear from the retards in the
lamestream media. These clowns need to be scorned with utter contempt and
prejudice.
David in Seattle:
On NPR this morning: Another "bad" thing about the falling gas prices, more traffic deaths.
I tried to find the clip on npr.org, but couldn't locate it. There are two articles on this below, ~1 week ago and another ~6 years ago. I think the discussion today was based on the KYTC article. At any rate, they made the point that higher gas prices, through market dynamics OR government taxes (conveniently), is required in order to prevent a huge increase in traffic deaths due to the current low prices at the pump.
http://www.wpsdlocal6.com/story/27717782/kytc-lower-gas-prices-could-lead-to-more-deaths-on-roadways
http://www.digits.newsvine.com/_news/2008/07/22/1687927-high-gas-prices-causing-lower-traffic-deaths
January 6, 2015, 2:24 pmColoComment:
I heard that, too. Here:
http://www.npr.org/2015/01/06/375308884/the-downside-of-cheaper-gas-more-accident-fatalities
(look for Programs, Morning Edition)
January 6, 2015, 3:06 pmMatthew Slyfield:
Those aren't the only options.
January 6, 2015, 3:15 pmJW:
No, no, no. Oil is similar to other Very Magical Commodities, like housing, in that they are only good when their price increases astronomically. If we're very, very lucky, they will increase beyond the capacity of the common man to easily tolerate. Every Ivy League educated government economist knows that.
That completely useless products, like computers and smartphones, always decrease in cost (or increase in functionality at the same cost), only proves this correct.
January 6, 2015, 4:58 pmIsaac Crawford:
Deflation is a disaster for people or entities in debt. That would be bad for people with mortgages of course but that's nothing compared to sovereign debt. Seemingly every country out there is up to its eyeballs in debt. So much of that debt was accrued in order to stave off "bad things" from happening. Sigh.
Sadly, once everything collapses you can be sure that the blame will be put squarely on capitalism and free trade. Buying metals while they are cheap...
January 6, 2015, 5:56 pmMJ:
Stories like this, especially the one from Kentucky, are troubling. I don't really expect much from the media in terms of understanding statistics or complex cause-and-effect relationships, but when the DOT people interviewed espouse these views without even looking at the available evidence, you start to get a sense of the competence level of the people in charge of some rather important things.
The story in question refers to an increase (and a single-year increase, at that) of 4 deaths per year as evidence of the problem. Recent data on levels of travel indicates extremely small increases during most of the months of 2014, and it's not really clear how much of this is could be attributable to falling gas prices as opposed to other factors like falling unemployment levels.
I also noticed one of the comments on the article pointed out the very relevant observation that prior to the first Arab oil embargo, when gas prices were still at historically quite low levels, traffic fatality rates were far higher than they are today. One could also point to the 1990s, when gas prices and fatality rates were falling concurrently.
There are just too many holes in the narrative, yet as you point out, these kinds of stories run any time there is a sustained drop in gas prices. Reminds me of how there are congressional hearings looking into the activities of oil companies and 'speculators' when gas prices rise, yet these same 'consumer protection' advocates are completely silent when the opposite trend takes hold.
January 7, 2015, 9:38 ammarcusbalbus:
if falling oil prices are good, why not falling prices in general? or falling prices in 25% of goods and services? or in all wages?
January 8, 2015, 4:41 pmDaveK:
The only reason the Government wants Europe-High gas prices is that they want Europe-High fuel taxes. It's all about grabbing yet another revenue stream for the Big-Government-Pork-Project.
January 9, 2015, 7:27 pmbigmaq1980:
Well, that is what capitalism is all about...either lower prices, or better quality/more quantity for the same price...as demonstrated by the success of Walmart, Apple, etc..
I don't disagree with Warren on the whole. In aggregate, with one key input factor for production (energy - from manufacturing, to distribution, to heating and lighting, to personal transportation) lowering in price, more money is available to be spent elsewhere (more goods, more investment). If it remains so, long term, it likely would provide a boost to productivity.
Anyone living in the Permian or Bakken Basins may disagree about personally being any better off though. It is not an argument that prices should be high...it just is.
The one difference vs "prices in general" is that oil prices have been less market driven than other prices (i.e. OPEC). Only the recent "success" in technological development of the oil extraction process has made that price more market driven (and Saudi Arabia has not been willing to cut back its production to compensate). Again, that is the "invisible forces" of (many individuals, under) capitalism at work.
Lowering all prices (including wages) by 25% by fiat, will do no good, just as giving everyone $1M cash will do no good. It moves prices (down or up), but does not change relative productivity/purchasing power....oil as an input factor, does, in the aggregate.
January 11, 2015, 9:53 amJohn L:
This constant weeping and gnashing of teeth, along with wringing of hands, is still going on, in high gear. And it also tends to make me angry. You see, I too am a Huge follower of Frederic Bastiat and the concept of the 'Unseen' advantage of things. It totally amazes me(sorry for using such a well trodden word) that there is so much economic ignorance making its way around the world.
And this genius Bastiat wasn't even an economist professionally, yet he was so wise. Its too bad that common sense is such an uncommon resource in society. Oh, and lets not forget all the Keyesian Superstition floating around as well
January 11, 2015, 9:52 pmJohn L:
How about "cheap stuff" and everyone is wealthier as a result? Your last name isn't really Krugman per chance?
January 11, 2015, 9:57 pmMike Powers:
It's cheap because it's made in China. Meanwhile nobody in America has a job.
January 12, 2015, 11:35 amJohn L:
No, that is only a part of it. Its less expensive because it is made in a place where the cost is less for production, shipping and all other costs. It doesn't matter if it is from Vietnam, Nigeria, or other third world countries.
And who is "nobody"? Do you mean "many"? Lets be accurate, because painting a broad brush and exaggerating undermines your credibility as a economic savy individual. One of the main reasons for not enough jobs is the result of this Collectivist in the WH. He doesn't know squat about economics, and is hell bent on pushing a Progressive agenda.
You obviously haven't heard of Frederic Bastiat either, have you?
January 12, 2015, 2:28 pmTrevor:
I think this current period of deflation in the crude markets has more to do with a stronger US dollar than it does with a supply and demand imbalance. So while I certainly agree with the unseen benefit of lower commodity prices, I think this has more to do with the boom and bust cycle brought about from the Federal Reserve's policy of easy money, which is not a good thing -- malinvestment is never a good thing. I think we're witnessing some version of the bust phase of Hayek's Stages of Production. It could be argued that without the artificially low interest rates of the last five years, the boom in North American crude production wouldn't have become as over-leveraged and over-produced like it has. Although I'm hesitant to call it a complete bust because the shale producers have hit upon some real increases in technology and lowered costs of production.
All that said, despite the easy-money factor, I think prices have corrected too far as it will result in a lot of drilling being cancelled. Without new drilling, supplies of crude are going to tighten faster than most realize due to the steep decline rates of shale wells. Prices will have to settle into somewhat of a higher equilibrium by the middle of the year to avoid future shortages.
January 12, 2015, 8:46 pm