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ECONOMIC ANALYSIS: High energy prices make consumers act rationally

August 29, 2005

Have you seen the latest opinion polls on the Bush administration? At a time when the U.S. economy is growing faster than that of any other industrialized nation, when unemployment rates are down and consumer spending is up, less than half of us think the president is doing a good job handling the economy.

There's plenty to find fault in our economic performance, of course. We still have a massive trade imbalance with the rest of the world. The federal budget deficit, given our position in the economic cycle, remains unacceptably high. And there is no denying the evidence that almost four consecutive years of economic growth have helped some households more than others.

But there's always plenty of ammunition out there for those who want to see the economic glass half empty. My question is, if we are so visibly upset with our economic leadership now, at a time when every objective report card says we're doing well, how are we going to respond to polls when the economy truly stumbles?

Let's hope we don't have to find out. In the meantime, let me share with you my simple theory why Americans seem so sour on the state of the economy these days. Two words: gas prices.

Those nasty little numbers we see hanging on poles and billboards as we commute to and from our jobs seem to trump everything else when it comes to forming an opinion on the economy.

After all, news of such things as job growth or manufacturing output seem like harmless abstractions compared with gas prices, which reach right into our pockets. And with those prices now a whopping 60 percent higher than they were three years ago, some of us are taking it personally.

But if we can take our personal affront at paying more for gas out of the picture for a moment, energy markets can be seen in a different light. In fact, those markets are producing very good results.

For one thing, we're getting supply to the marketplace with little disruption during a period of unprecedented high worldwide demand.

Big prices mean big profits, of course, but they also mean high losses for any facility, or any country, for that matter, that goes offline. And while price increases are only marginally affecting the immediate supply of crude oil, they do make higher-cost resources, such as Canadian oil-soaked sand, economically viable.

On the demand side, sustained higher gas prices give us an opportunity to clarify what has always been a confusing energy policy coming out of Washington.

For too many years, we have pursued a contradiction-reduced dependence on oil together with a low price. We've enforced fleet mileage restrictions on automakers, subsidized alternative fuels, and even built high-occupancy vehicle lanes on urban freeways to try to get ourselves collectively to use less oil.

At the same time, the very low prices that prevailed until just a few years ago have produced a nation with more cars than drivers and the 8,500-pound Hummer.

In the days of cheap gas, we wanted everyone else to conserve, so we could continue to painlessly consume what we wished. But now it is each and every one of us who pay for that privilege. Guess which situation will produce more conservation?

It is the Bush administration's bad luck, perhaps, to be holding the reins of government when the inevitable consequence of rising demand and limited supply rears its ugly head in the form of higher prices. Those prices are creating problems for everyone, certainly. But they're fixing a few things as well.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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