The Oil Problem

As you may recall, right before the world economy collapsed oil was becoming incredibly expensive. Now, courtesy of global economic collapse, it’s cheap again. But it’s not actually all that cheap in historical terms. And it’s showing a notable tendency to leap upwards at the slightest sign of recovery. This suggests that any recovery might entail immediate large increases in gasoline prices and so forth in a way that could, in turn, cripple the recovery. As Ryan Avent says:

As the global economy recovers, so too will oil prices, and fast. That increase is going to cut the legs out from under a recovery; a rise in oil prices is like a tax increase, which is contractionary. And if we nonetheless manage to grow through the rise, the increase in prices and oil demand will expand the trade deficit once more.

I don’t think it’s that hard to work around these issues. We could pass a substantial gas tax increase now to take effect in two or three years. In expectation of the increase, consumers would purchase more fuel efficient automobiles, potentially boosting auto sales and reducing vulnerability to high oil prices. And I’m sure I don’t even need to say that a program of rapid expansion of transit and passenger and freight rail capacity, funded immediately by deficit spending and after recovery by gas and congestion taxes, would kill multiple birds with one stone — providing stimulus, facilitating structural shifts, and reducing exposure to rising oil prices.

This is exactly right. I find it very disappointing that there doesn’t seem to be legislative work on this happening. It’s clear today that economic conditions are worse than they were in February when the first stimulus package was being outlined, and the headline number on that package was too small given even the macroeconomic projections we had back then. What’s more, there’s near-universal agreement that even if optimists are right and growth returns in Q3 or Q4 of 2009 that it would still take years to re-achieve full employment. Under the circumstances, I think there’s a strong case for investment in rail infrastructure (both freight, intercity passenger, and commuter) projects beyond the merely “shovel ready.”

Beyond that, there remains a very strong case for a federal role in funding mass transit operating costs. All across America, transit systems are hiking fares and cutting back on service. That’s directly contractionary. It’s taking a lot of money out of the pockets of people with high marginal propensities to consume, and it’s also create a perverse situation where we’re laying-off or furloughing bus drivers with one hand, even as we’re trying to employ people in new transit starts. Meanwhile, once the service is cut back, there will be difficulty ramping it back up to speed when growth returns. Which means a lot of people could end up caught in the oil price hike trap. We ought to be doing the reverse. Cutting fares and expanding service. That would work as short-term stimulus, and it would also create a situation where we’re better-prepared for the next oil price spike.