Do High Oil Prices Doom The US Economy?

A blog about business and economics.
Feb. 25 2012 8:34 AM

Do High Oil Prices Doom The US Economy?

139766806
Employees of Swiss oil refinery Petroplus, Europe's largest independent oil refiner walk on the site on February 24, 2012 in Petit-Couronne, near Rouen, northwestern France.

Photo by KENZO TRIBOUILLARD/AFP/Getty Images

As I explored briefly in my column on the politics of gas prices this is less straightforward than it might first appear. As Michael Levi writes we've traditionally wanted to distinguish between supply shocks and demand shocks as drivers of price spikes. When oil gets expensive because of a supply disruption, that hurts America. But when oil gets expensive because there's lots of demand and economic growth, that's just a sign of growth. But perhaps this time it's different. The US isn't as big a slice of the global demand pie and "western economies can be on their knees, but oil demand can still be on the upswing due to healthy growth in China, India, and other emerging economies (not least those that also export oil)."

I still think one needs to say more about exactly what the dynamics are. If China grows fast, then not only should Chinese imports of oil go up, China ought to be importing more airplanes and soybean oil and Friends reruns. Similarly if Kuwait gets rich selling oil, then we're the ones who sell them the military equipment and Friends reruns they buy. For things to go wrong for the U.S. economy something else has to go wrong over and above the oil. We can see what those "somethings" might be, related to exchange rate issues or the failure of the US government to issue a quantity of bonds commensurate to global demand. But it looks to me as if a demand-side oil issue is really just the same old issue of the trade deficit and the international balance of payments and not the second coming of a 1970s-style oil price shock. Perhaps it's a monetary policy issue. We send dollars abroad in exchange for oil, but then the dollars get sent back in exchange for bonds. That ought to lower interest rates and induce investment in the United States, but nominal interest rates are already at zero so the loop is cut. Even so, higher gas prices should push the price level up which pushes real interest rates down which induces investment in the United States. The chain will only be broken here if the Fed decides to ignore its own self-guidance and target headline inflation instead of core inflation. If you do what the ECB does and react to an increase in the price of oil imports with tighter money, then clearly higher oil prices slow growth. But that's the ECB blundering (a specialty in Frankfurt) not oil prices strangling growth per se.

Advertisement

Still I'm going to file this under "provisional." Apologies for noodling in public. My hope is that in the future people can spell out in more detail exactly how they think things can go wrong.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

History

Slate Plus Early Read: The Self-Made Man

The story of America’s most pliable, pernicious, irrepressible myth.

Rehtaeh Parsons Was the Most Famous Victim in Canada. Now, Journalists Can’t Even Say Her Name.

Mitt Romney May Be Weighing a 2016 Run. That Would Be a Big Mistake.

Amazing Photos From Hong Kong’s Umbrella Revolution

Transparent Is the Fall’s Only Great New Show

The XX Factor

Rehtaeh Parsons Was the Most Famous Victim in Canada

Now, journalists can't even say her name.

Doublex

Lena Dunham, the Book

More shtick than honesty in Not That Kind of Girl.

What a Juicy New Book About Diane Sawyer and Katie Couric Fails to Tell Us About the TV News Business

Does Your Child Have Sluggish Cognitive Tempo? Or Is That Just a Disorder Made Up to Scare You?

  News & Politics
Foreigners
Sept. 29 2014 10:00 PM “Everything Must Change in Italy” An interview with Italian Prime Minster Matteo Renzi.
  Business
Moneybox
Sept. 29 2014 7:01 PM We May Never Know If Larry Ellison Flew a Fighter Jet Under the Golden Gate Bridge
  Life
Dear Prudence
Sept. 30 2014 6:00 AM Drive-By Bounty Prudie advises a woman whose boyfriend demands she flash truckers on the highway.
  Double X
The XX Factor
Sept. 29 2014 1:52 PM Do Not Fear California’s New Affirmative Consent Law
  Slate Plus
Slate Fare
Sept. 29 2014 8:45 AM Slate Isn’t Too Liberal, but … What readers said about the magazine’s bias and balance.
  Arts
Brow Beat
Sept. 29 2014 9:06 PM Paul Thomas Anderson’s Inherent Vice Looks Like a Comic Masterpiece
  Technology
Future Tense
Sept. 29 2014 11:56 PM Innovation Starvation, the Next Generation Humankind has lots of great ideas for the future. We need people to carry them out.
  Health & Science
Bad Astronomy
Sept. 29 2014 12:01 PM This Is Your MOM’s Mars
  Sports
Sports Nut
Sept. 28 2014 8:30 PM NFL Players Die Young. Or Maybe They Live Long Lives. Why it’s so hard to pin down the effects of football on players’ lives.