Early in the October 16 town hall debate, audience member Phillip Tricolla asked President Obama whether he agreed with Energy Secretary Steven Chu that his department is not concerned about lowering gasoline prices. This led to a broader discussion of energy policy, ripe with claims and counter claims by the President and Governor Romney. Let’s consider gasoline prices at the pump.
Initially, President Obama passed on the gasoline price issue, but Governor Romney picked it back up, noting that, “When the President took office, the price of gasoline here in Nassau County was about $1.86 a gallon. Now it’s $4.00 a gallon.” Obama had to agree on the prices, but had some very interesting things to say about what they meant.
Prompted by moderator Candy Crowley, Obama said the low prices at the beginning of 2009 (far below the summer 2008 prices for both gasoline and diesel) were the direct result of an “economy … on the verge of collapse, because we were about to go through the worst recession since the Great Depression, as a consequence of some of the same policies that Governor Romney’s now promoting.” He then equated low fuel prices with a weak economy, adding, “so it’s conceivable that Governor Romney could bring down gas prices because with his policies, we might be back in that same mess.”
But look at what the experts say. Tom Whipple, writing in OilPrice.com, showed how the short-term drop in oil prices was the best medicine for the U.S. economy, as it brought $1.8 billion a day back into our collective pockets. The fall from the short-term July 2008 peak of $4.20 a gallon put money back into consumers’ pockets at a rate of $600 billion a year — nearly the same amount as the federal stimulus provided and a lot quicker.” We might add, with the distribution of the funds much more democratically spread around and placed into the hands of ordinary people rather than into the vaults of big banks. Whipple’s conclusion was the converse of Obama’s observations — that high oil prices are “sucking the life blood out of the U.S. economy.”
Moreover, writing last March in that right-wing extremist tome Atlantic Monthly, Ross DeVol, chief research officer at the nonpartisan, independent economic think tank the Milken Institute, noted that “rising oil and gasoline prices are once again threatening the U.S. economic recovery.” He added, “Higher oil prices have played a role in U.S. recessions since 1973,” especially when the Federal Reserve tightens money policy.” While the Fed has not raised rates under Obama, it has helped banks in other ways with the result that businesses wanting to grow, or individuals wanting to buy property, have a much harder time getting loans.
“In many respects,” DeVol says, “higher oil prices act as a tax on consumers, and most of those dollars move out of the United States.” For businesses, “higher oil prices increase the production cost of fertilizers and food processing and are passed on to consumers as higher prices at the grocery store. As these cost increases ripple across multiple supply chains, they can push core inflation higher – if the oil price increase is sustained.”
DeVol shows that each $10 per barrel increase in crude oil prices has various negative effects on the U.S. economy (see chart). But it can be worse. “There is some statistical evidence,” DeVol suggests, “demonstrating that consumer confidence is harmed when the price of gasoline crosses a dollar threshold; for example, moving from $3.55 to $4.05 per gallon. This might push the impact of an incremental $10 increase in oil prices to 0.3 percent off of real GDP growth if that threshold price is passed.” And, it appears we could once again be headed in that direction.