Gas After the Crash

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Remember high gasoline prices? It all seems so six months ago. Then came the crash, the collapse of the economy, and with it down went the price of oil. But Ryan Avent observes that in some ways oil hasn’t gotten especially cheap, “It’s worth pointing out that the most significant collapse in global economic activity since World War II barely managed to push oil into the $30 per barrel range. Even now, as economic outlooks remain dim, prices have edged back up into the neighborhood of $50 per barrel.” Meanwhile, the crash has brought investment in new exploration and refining capacity to a grinding halt. And even in a crash year, we take a fair amount of oil out of the ground. All of which is to say that the demand curve for oil seems, at this point, to have a pretty steep slope. In other words, an economic recovery could cause prices to skyrocket.

In most of the world, and in some of the United States, that will lead people to resume their 2008 trend of less driving and more transit. But as is well known, many Americans live and/or work in places with no reasonable access to mass transit. Meanwhile, the market for—and therefore price of—oil is global. Which means that a global recovery could spark a rise in oil prices that hits America specifically very hard and in effect strangles our recovery in the crib. At that point it becomes an open question as to whether we drag the world down with us, in which case the cycle repeats, or if we just get left behind as continued global growth keeps pushing the price up and pinching American consumers harder-and-harder.

The answer, of course, is to take advantage of this period of “output gap” and low Treasury rates to invest in expanded mass transit capacities. But while the stimulus bill does do some good stuff for transit, it’s not even enough to make up for the rate at which state and local governments are curtailing transit services, much less to really leave Americans in a position to ride the bus to the new jobs we’re hoping to see created in 2010.