Tuesday, July 29, 2008

No, Virginia, High Oil Prices are BAD!

Or at least not anywhere near as good as people are implying.

A lot of talk in the media recently has been about the "good side" of high oil prices. For example, a list that a friend recently sent me in an email includes the following "goods" about high gas prices:
1. Globalized Jobs Return Home
2. Sprawl Stalls - 'Across the country, real estate agents are reporting that many home buyers are looking to move closer to cities. Gas prices are shaping their decisions.' -- Did you not call for an increase in population density at one point?
3. Four-Day Workweeks
4. Less pollution -- heart of the matter
5. More Frugality – 'We're all wasting less.' – Also advocated by WFan.
6. Fewer Traffic Deaths
7. Cheaper Insurance
8. Less Traffic
9. More Cops on the Beat
10. Less Obesity

And the most recent Businessweek?
The Real Question: Should Oil Be Cheap?
Expensive oil hurts, but there's a business case to be made for a floor under the price of crude

The basic idea is pretty simple: low oil prices in the past cause all sorts of bad things that we don't like, such as childhood obesity, reliance on foreign oil, outsourcing of jobs, etc. Since oil prices are now high, people can exercise more, cut back on "frivolous consumption," develop alternatives to oil, and develop public transportation networks.

Don't get me wrong. Oil prices in the 1990s were probably too low. Hell, they are probably too low NOW: the price of gasoline still doesn't include the environmental damage it causes. But that's due to the externalities of oil prices...and, like I just said, the externalities still existed. Other than that, everything represented fundamentals.

When it comes to a good with a price determined exclusively by fundamentals and where the private cost is the total cost of the good (IE, a perfectly competitive market with no externalities), more is ALWAYS better. We call those "supply-side shifts." And as any econ 101 student can tell you, supply side shifts mean more goods at lower prices. People don't care so much about being obese, having awesome public transit, or supplying foreign nations with dollars: they are far, far more concerned about having cheap gasoline. They WANT cheap gasoline.

Or, just take a look at those most hurt by the high gasoline prices: the poor. They cannot afford new hybrid cars, they are not located near public transit, and they can't cut back much on their own driving. It's precisely the reason why economists say that energy taxes need to be paired with lump sum rebates especially targeted towards those with low income: people with low income are hurt worse when gas prices rise.

So, what do we really want? We want cheap oil. What would be REALLY awesome if we had cheap oil that didn't negatively affect the environment. And doesn't that make sense? More of good stuff=good.

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