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Instagram has been busy this week with people posting pictures of gas stations with low prices, something that most would deem a miracle. Here in Florida, everyone is ecstatic that prices are falling below $3 a gallon, which marks a four-year low for the state.
Lower gas prices are a positive thing for most people. Consumers are able to save money and increase their disposable income for other goods and services, such as going out to eat more or seeing an extra movie or two at the theater.
A common belief held by most economists suggests that for every 1-cent decrease in the price of a gallon of gas, there is an additional $1 billion increase in nationwide household consumption. This shock to the economy is definitely welcome in these uncertain times.
Consumers aren’t the only ones who rejoice at paying less for gas. Typically, with decreased energy costs, we also see businesses able to increase their profits, which can mean possible job creation or more investment and growth in the economy.
The interesting thing about economics is that whenever something is supposedly only a positive, there is almost always something negative that follows.
How can lower gas prices possibly be bad for anybody? Higher gas prices might squeeze most people at the pump, but it’s great for the energy boom that America has enjoyed over the last few years. According to the Wall Street Journal, “high oil prices in recent years drove the energy boom by making costly drilling techniques like hydraulic fracturing economically feasible. Now, oil-rich states could see slow job growth. Producers would see profits tumble. And investors are already retrenching from one of the hottest sectors of the expansion.”
North Dakota, one of these oil-rich states with the profitable Bakken shale, was able to bypass most of the devastating effects that came with the Great Recession. In fact, the state had the fastest-growing economy in the country last year, enjoying a growth rate of 9.7 percent and an unemployment rate of 2.8 percent. If the price of a barrel of oil continues to drop below its average price of $85 right now, it could see slower, and possibly reversed, job growth.
These reductions in gas prices also mean lower profits for big oil companies, a situation that doesn’t upset some people who see them as greedy and destructive. This characterization is debatable, but what these lower gas prices certainly do mean is something that should concern everybody: decresed investment into alternative energy sources.
Anthony Perl, a professor at Simon Fraser University in British Columbia, said, “The incentives for conservation and alternative energy will be reduced in the short term.” This could mean less advancement toward research and development toward new sources of energy, an endeavor that has constantly dealt with the problem of making strides and then hitting the brakes.
Deeper issues reside with lower gas prices. Sometimes it’s an indication of an impending recession or negative shock. Gregg Laskoski, senior oil analyst at GasBuddy.com, said, “We are all somewhat pleased to see prices going lower at the pump, but I’m not sure it’s cause for celebration. It’s still an indication of much deeper problems in our economy.”
The decline in prices has already affected the stock market. Last Wednesday, the Dow Jones industrial average dropped nearly 500 points in one day, following with the move of lower gas prices, according to Fortune magazine. The stock market and oil prices are connected, and both rely upon confidence and stability to remain healthy and grow.
Although oil prices are pretty much set by world demand and supply and by OPEC, there are some things that our policymakers could do to help.
As previously mentioned, the stock market and oil prices prosper from clarity and confidence. Currently, investors and business owners experience confusion and instability when we don’t have a clear trajectory for our federal deficit and tax code.
When we confuse our policies and play political games, we hurt economic growth and increased investment. In a dream world, Congress would begin to reduce the federal deficit drastically and replace our complicated tax code with something ever-changing that isn’t filled with loopholes — something like the FairTax.
All of our wallets might be a little thicker right now, which is a great start to the holiday season where people might be more inclined to spend this extra cash instead of just holding onto it.
However, be wary about what these prices also bring: less investment in alternative energy and a possible transition from recovery to recession.
Nick Eagle is a UF economics and political science senior. His columns appear on Mondays.
[A version of this story ran on page 7 on 11/1/2014]
