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ECONOMIC ANALYSIS: Have surging gas prices lost their stinging power?

July 18, 2005

Have you checked out the satellite radios that are showing up everywhere nowadays? They've got a button and a station for just about everything. If you want to hear music from the 1960s, or the 1940s, it's yours at the press of a button.

If the radio gave you economic news, and you hit the button marked 1980s, you might get something like this: Oil prices skyrocket, inflation roars, car sales plummet and the economy plunges into recession.

But hit the button for current economic news and the music is completely different: Crude oil prices have surged again, breaking through the $60-a-barrel mark without breaking a sweat. Yet consumer prices actually fell in May. Motor vehicle sales, thanks to a record month at General Motors dealers, roared ahead last month. And the scorekeepers at the Bureau of Economic Analysis keep revising the data to make the economy look better.

That can change tomorrow, of course. Higher oil prices are putting tremendous pressure on many parts of the economy, and policymakers are clearly worried. Yet the response of consumers and businesses thus far to the high cost of crude oil suggests that something like a revolution has taken place in the marketplace.

Consider this stunning fact. In the month of June, with its employee-discount promotion packing showroom floors, GM enjoyed sales that were 40 percent higher than June of last year. But even with gas prices digging deeper into wallets, the higher volume was heavily tilted toward gas-guzzling trucks and SUVs, sales of which were up an astounding 70 percent.

Either consumers are betting that gas prices will fall, or they simply haven't risen enough yet to cause much pain. When you look at the data, there's some support for each assertion.

There are some reasonably intelligent people saying high energy prices are like a tax on the economy, removing money from our pocketbooks that we used to be able to spend. Those people are wrong. Price increases change behavior. They motivate us to find ways to avoid the higher costs, just as they motivate exploration and exploitation of known resources.

It is precisely that process, set in motion by those catastrophic price shocks of the 1980s, that has changed the reaction of the economy to energy shocks today. The sophisticated vehicles of today, with multiple computers, lightweight materials and widespread use of once-exotic technologies like fuel injection and radial tires, bear little resemblance to the heavy iron Detroit pumped out for so many decades before. Almost everything that uses energy in this country-from furnaces to locomotives-has experienced a similar overhaul.

And are gas prices really that high? Compared with medical care, college tuition, housing or even food, the increase in gasoline prices over the past 25 years has been quite modest. Relative to prices in general, gasoline prices fell sharply over much of the last two decades, which helps explain the resurgence of heavier, more powerful vehicles over the same period. In relative terms, the current price of gas remains comfortably below the peak reached in 1982.

That doesn't mean the economy is immune to energy price shocks, or that the recent double-digit increases in oil prices haven't hurt many businesses and households. The changes those price increases force upon us are, for the most part, unwelcome. But we have a ways to go before they bring the economy to its knees.



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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