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The Investment Cost Of Our Energy Price Roller Coaster

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"The Investment Cost Of Our Energy Price Roller Coaster"

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oildrumToday, the Associated Press’ Chris Kahn reported that “oil prices rose above $69 a barrel Thursday after the government said that the economy may be faring better than previously thought.” Nineteen hours before that article, Kahn penned a piece reporting that “energy prices fell Wednesday after the government reported that unused gasoline in storage grew for the third-straight week, another signal that consumer demand for energy is waning.”

This one day up and down illustrates a bigger problem: the economic uncertainty created by energy price volatility. We just had a streak of fifty straight days of rising gas prices, which is just one in a long series of energy price spikes that have afflicted the country.

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I noted earlier in the month that rising gas prices could threaten billions in worldwide stimulus, effectively snuffing out any economic recovery that’s occurring. And as CAP’s Amanda Logan and Christian Weller point out, the energy price volatility that we’re subjected to prevents all sorts of personal and business investments that could help speed recovery:

– There is an 83.3 percent chance that consumers will spend a smaller share of their disposable income on vehicles after they have just gone through a period of high price volatility. In fact, consumers buy about 1.6 percent fewer cars one year after experiencing a year-long episode of large energy price swings.

Investment in residential structures — new home purchases and upgrades — dropped by 0.5 percentage points relative to gross domestic product on average after energy prices swung wildly for 12 months.

– There is a 91.7 percent chance that business investment in transportation equipment — such as trucks and tractors — as a share of gross domestic product will decline after extraordinary energy price volatility, largely because businesses will buy 11.0 percent fewer vehicles.

Logan and Weller do point out though, that “not everything declines after high energy price volatility. The profit rate — profits to assets — of the oil and gas industry tends to surge during periods of high energy price volatility.”

Something should really be done to prevent this “roller coaster ride of large energy price swings.” Logan and Weller suggest that a renewable energy standard could help. I’m still in favor of using the gas tax to smooth out the boom and bust cycle of prices, which, as Jason E. Bordoff and Gilbert E. Metcalf at the Brookings Institution write, would “provide a strong, stable price signal to encourage both conservation and alternatives to oil.”

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