Do Lower Energy Prices Have a Downside?

Technically the answer to that question is yes. Lower energy prices have a downside for people who make more money from higher energy prices. Just like tailors suffered when the sewing machine was invented, or harvesters lost their income when harvesting machinery was invented.

But notice these were temporary disruptions. Ultimately, everyone became better off, including the people who originally lost income. Why? Because the cost of living went down for everyone. Everyone had cheaper clothing or cheaper food since making clothes and harvesting grain no longer cost as much. But, for awhile, the people who had depended on the higher price of sewing and harvesting had to look for a new way to make a living. Fortunately, the increased prosperity of the populace usually means that there will be new ways to earn an income.

But today people are saying something completely different. They are claiming that lower energy prices has a downside for the economy. That makes no sense.

The AP Headline says it all: “Why Drop in Oil Prices Has a Downside for U.S. Economy.”

If you’re a driver, a shipper or an airline, low oil prices sure feel nice. But there are downsides to the recent plunge in oil prices – for the oil industry and for the economy.

[See also, “Our Economic Masters Are Afraid of Low Prices!]

Higher prices are never good for the economy. Yes, they might be good for the people who get to charge those prices, but those people are themselves a drag on the economy. A rising standard of living requires ever lowering prices. That is the economy we would have if we had sound money.

The Associated Press article gives us three distinct arguments. One is that falling oil prices are partly caused by falling demand—and may indicate “another” (if you believe the first one ended) recession. But that confuses cause and effect. A recession means that fewer people can purchase energy. As a result, the energy suppliers cut their prices in an attempt to get more buyers.

What would you prefer if you suddenly found your income cut down in an economic downturn? Would you be most helped if oil prices stayed high or if they suddenly sank so that you were able to afford to buy gas more easily? Obviously, when the oil prices go down in response to a recession, they actually begin a process that naturally stimulates recovery. When oil prices lower, that means that people can begin restarting the economy. Truckers and shippers can charge less and thus help economic production.

The second argument is that the oil industry itself will not make as much money as before. But that downside for people in the oil sector is not a downside for the economy as a whole. Maybe we need people eventually moved out of the oil industry into a different sector of the economy. That relocation may be unpleasant, but it could easily be good news for the economy as a whole.

Of course, if Big Oil can use their influence to get the government to bail them out, that would be truly bad for the U.S. economy.

obama big oil

The third argument is derived from currency superstitions: “a stronger dollar – could hurt the U.S. economy by reducing exports, employment, and spending.”

This assumes that our economy is completely driven by exports. That is nonsense. People in the United States are also consumers who purchase goods. A stronger dollar means they will be able to buy more stuff. Why assume that exports are more important than imports—that getting foreigners to buy our stuff is more important than we ourselves buying our stuff (and their stuff)? There is an upside to a stronger dollar.

I suspect the real reason our elites want a weak dollar is because we are a debtor nation. But being debt slaves is bad for the U.S. economy under all circumstances. That is no reason to wish higher energy prices on the American economy.