If you follow the news, you might assume there are two people currently running the U.S. economy — Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke. They are certainly in charge of addressing the meltdown in the financial sector. But in another important sector, oil, it appears someone else is calling many of the shots: You.
In July, the price of oil hit an all-time high of $147.27 a barrel. On Thursday it closed below $70 for the first time in 14 months, before rising Friday to $71.85 on the New York Mercantile Exchange. After bracing themselves for $200-a-barrel petroleum, Americans may soon see the stuff being unloaded for $60.
What brought on the 51 percent plummet? One big factor is that U.S. motorists burning less gasoline. MasterCard reports that gasoline purchases are off by more than 9 percent from a year ago. In the process, Americans are spurning oversized SUVs for cars, including hybrids, that squeeze a lot more distance out of every gallon.
That may come as a surprise to those who predicted this summer that relentlessly growing demand would keep upward pressure on prices. But it shouldn’t. A change in oil prices has not only microeconomic but macroeconomic effects that tend to counteract the change. In fact, nine of the 10 U.S. recessions since World War II have come after big jumps in the price of oil.
What happens when a recession hits? Demand for oil drops, which pushes prices down. What happens when prices fall? Consumption rises, which pushes prices up. And so on and so on.
Some people had the idea that rapidly growing nations like China and India were somehow immune to the pain of soaring prices. But now it appears that this year, for the first time since the recession of 1991-92, the world’s consumption of oil will not increase. What do you know? It turns out that economic laws can be translated into Mandarin or Hindi.
Falling crude prices mean gasoline prices are also falling and may dip below $3-a-gallon even in tax-happy Illinois. And the result will be a welcome tonic to a flagging economy nationwide. If prices ultimately settle at $80 a barrel, Lawrence Goldstein, an analyst with the Energy Policy Research Foundation, told The Wall Street Journal, “that will amount to essentially a $275 billion stimulus package to the U.S. economy.”
Let this be a signal to Democrats in Congress now entertaining a second fiscal stimulus of perhaps $300 billion, nearly double the amount taxpayers handed to themselves earlier this year. Never mind that the first one accomplished little. The general slowdown has already triggered fiscal developments (higher spending, less revenue) that should help growth. And the oil windfall leaves Americans with more to spend on other goods and services, delivering one more positive jolt — without piling up more federal debt.
The plunge in oil prices is a tribute to the power of supply and demand — and to the sovereignty of the consumer. It’s also an argument for the government to do less, not more.
