Will Rising Gasoline Costs Cause a Depression?

2008-05-04T09:43:00.000-07:00

No one is enjoying or benefiting from the rapid increase in gas prices over the past couple of years (with the possible exception of those owning substantial blocks of petroleum industry stock). But to argue that these price increases will cause an economic depression is a gross exaggeration. Before looking at why this is so, I want to (at the risk of being pedantic) be clear about just what I mean by the terms "recession" and "depression."

A recession is defined as two or more consecutive quarters of negative (falling) economic output. There is no formal definition for a depression, but the term is usually understood to mean a period of greatly lowered economic output, lasting for several years and without sustained recovery. Now, there are three points to consider in showing that we are not headed toward such a depression due to increases in gas prices. First, a look at similar jumps in the cost of gas in the past; second we need to look at what other factors are "in play" in the current economic climate, and finally at what the short- and long-term effects of the higher gas prices is likely to be.

This jump in oil (and thus gasoline) prices is substantial--essentially it has doubled in a couple of years. But it is actually no more than the latest in a series of such jumps, dating back to the 1973 "oil shock.” In each case, the economic consequences have been negative. No one seriously doubts that will be the case this time around. However, those negative effects are limited. The original 1973 jump in oil prices is a good example. Then, the economy was already under stress from the effects of a long war, high inflation, and nagging government spending deficits. Combined with the "oil shock" these factors did send the economy into a recession, and for several years afterward, economic growth remained sluggish. But no one could reasonably describe the period as a depression.

The current economic climate is in many ways similar to that in 1973. In addition to the rise in oil prices, and in energy costs in general, we have an economy burdened by the effects of a long war, rising inflation, and a housing market that is in crisis. Economic growth is already falling. Are we then headed for a recession? Well, although economic predictions are notorious for their lack of certainty, but it is very likely.

So, what are the likely consequences of a recession? In the short term, there is little to cheer about. Along with a recession will certainly come a tight job market, higher unemployment, and the human cost in terms of people losing hard-earned wealth, homes, and many other things. But the long-term outlook may actually be rather bright. I'm not trying to find a "silver lining" in the current economic clouds. But there is opportunity-for individuals, companies, ant the nation as a whole. This was true in the years following the 1973 oil shock. By the end of the 1970s, a series of public and private initiatives designed to make America independent of foreign oil were in place and showing promising early results, as were policies to promote innovation in energy technology and conservation. Sadly, those efforts were largely abandoned after 1980.

We have a similar opportunity now--in fact, a better one. Technology for both energy efficient products and alternative technologies for producing energy have advanced enormously in 30 years. Investment in these areas holds the potential for creating new businesses and new jobs, as well as making America energy independent and helping the environment. But there is also a caveat here: this is by no means inevitable, any more than it was in the 1970s. Government policy can and must play an important role. But it needs to be policy that promotes innovation and entrepreneurship. If, in the current political climate, policy makers resort to over-regulation and burdensome mandates, this opportunity for progress may well be lost.

To sum it up: we are not headed for a "depression," tough the short-term outlook is rather bleak. But within the problems related to the rising price of gasoline and other energy
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2008-04-29T19:34:00.000-07:00

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That being said, my assistant (or boss, depending on how you look at it) is Pandora, a 10-6ear old Calico longhair cat who most definitely lives up to her name. At the moment she is helping me by using my computer mouse as a pillow. I take no responsibility for the results!

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Eclectic Crab

Will Rising Gasoline Costs Cause a Depression?