Rising Oil Prices Highlights The Cost Of America’s Suburbanization Driven Industrial Policy

In our dynamic, highly competitive ever shifting economy the best thing to do is be a large legacy firm in the natural resource extraction business:

First-quarter crude prices averaged about $100 a barrel, or about 20% higher than a year ago, pushed upward by oil-supply concerns due to political unrest in the Arab World and a recovering global economy. That spike is expected to lift earnings by about 50% at Exxon Mobil Corp., and about 33% each at Chevron Corp. and ConocoPhillips, compared with a year earlier.

Everywhere you look, the short-term price elasticity of demand for gasoline is low. People basically own the cars they own, they live where they live, and they work where they work. So when gas prices get more expensive, spending on gasoline booms. With households credit-constrained, that means huge cutbacks in spending on things that aren’t gasoline. That becomes a huge hit to aggregate demand, and a big drag on our economy.

But while gasoline consumption isn’t very price sensitive in the short-run, longer term factors about taxation, housing policy and transportation policy play a big role in this process. In Europe, a smaller share of the population drives to work. And they drive lighter, more fuel efficient cars. And they commute shorter distances. Consequently, their economy is less vulnerable to this kind of shock. The only real security for America in the long-run is that kind of transformation to an economy less driven by the assumption that gasoline will always and forever be cheap.