HICKS: Cheap petrol might lead to full-blown recovery

Mike HicksLooking over 2015, it is clear that oil prices will continue to dominate economic and political discussion for much of the year. Perhaps it is a sad thing that such a mundane commodity matters so much, but if we weren’t worried about oil, we might be fretting the price of oats.

Petroleum prices are part of the costs of almost all goods and services. A nearly 50-percent price drop over the past half-year means the actual costs of production for things big and small have dropped. This doesn’t always mean the price will drop for consumers. We know prices are sticky and, for a variety of reasons, business might not immediately lower prices.

Of course, I wish the prices of goods I buy were more flexible, but the economy still benefits from the gasoline price drop. Businesses might be more profitable and might be able to use the extra revenue to hire more workers or make other investments. If they pass their profits on to owners, this will mean more money for retirees and other stockholders.

Either way, the money eventually flows back into the economy.

Notably, a positive oil price shock might significantly alter the short-run growth of the economy. There remains great fragility in parts of the U.S. economy, and although the economy is getting better, it is far from good.

Economists use all kinds of euphemisms to describe a pivotal moment for the economy as it shifts to better performance. None yet apply to our current recovery, but gasoline prices might just be the right tonic.

Forgive me for using a football analogy, but there is a moment in most games when it is clear to everyone that one side must win. It is an ethereal moment when victory is largely certain, and isn’t so much dependent on the score or the clock, but the feeling in the air. That moment has not yet happened in this economy, but a year of much lower petroleum prices may well bring us to a full-blown recovery.

This takes us to the inevitable policy discussion. The economy has performed weakly for seven years. The Obama administration has done much to try to make it better.

At the same time, this administration has pursued policies to keep oil prices high, with the secretary of energy openly advocating for much higher prices during the darkest days of the recession. It was a clear policy choice designed to reduce U.S. oil consumption. However, this is one policy failure most of us will be grateful for.•


Hicks is the George and Frances Ball distinguished professor of economics and director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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