Higher prices at the pump mean a better global economy

June 4, 2012

COLUMNS, Uncategorized

Nancy Anderson, columnist

Gas prices are falling. Thank goodness! Something happens to my psyche when the number at the pump goes over $50, and I have a fuel efficient car and a short commute.

Nationally, we only spend about 6 percent of our income on all energy. That includes transportation costs. In Mississippi, the number is a bit higher. We are a rural state, and many of our citizens travel quite a ways just to get to work each day. Our cars are older and less fuel efficient, and we love trucks. In fact, many people depend on their trucks in their work. Try being a plumber or electrician without a truck or van to haul all your stuff.

With all the wild swings in gas prices, we are left to wonder who or what controls the price of gasoline. A recent survey showed that two-thirds of Republicans and one-third of Democrats thought the price was up to the President. Back during Bush’s tenure, only one-third of Republicans and two-thirds of Democrats thought so. Hmm…

Oil prices are determined by supply and demand. When the global economy tanked, oil prices plummeted. As economies across the globe pick up steam, the price of oil naturally climbs. So, higher gas prices are usually a sign of growth. We are still an oil-driven planet, so this commodity measures the economic temperature.

But we have these weird swings in between the cycles of recession and growth. Most often, this comes from a supply shock. A hurricane in the Gulf of Mexico and the possible kink in the supply chain will cause a spike. An explosion at a critical refinery will cause a spike. Most recently, Iran’s threat to shut down an important oil route caused a spike. And it’s not just the actual decline in supply that causes prices to increase. The mere possibility of a supply issue will cause prices to climb.

Issues with Iran have eased, and with it, the price of oil. That’s the good news. The most recent possible supply shock is not so possible anymore. The bad news is that oil prices have declined because the global economy is slowing. Overall demand for this important commodity has declined.

Supply shocks come and go, but an overall upward trend is a sign of improvements for everyone. So, I’m glad I can fill up my tank for less, but maybe I should be cheering for higher prices. If I can’t have it both ways, I’ll go for higher prices at the pump if it means a better overall economy.

 >> Nancy Lottridge Anderson, Ph.D., CFA, is president of New Perspectives Inc. in Ridgeland — (601) 991-3158. She is also an assistant professor of finance at Mississippi College. Her e-mail address is nanderson@newper.com, and her website is www.newper.com.

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2 Responses to “Higher prices at the pump mean a better global economy”

  1. John Lacourrege Says:

    What you left out of your comments is the fact that a president who by executive fiat interferes with and therefore restricts the exploration for and production of oil does, in fact, affect the price of that commodity via the law of supply and demand. Just one example was this president’s overreaction to the disastrous explosion, fire and sinking of a BP drilling platform, followed by an admittedly massive oil spill. His order to curtail all such drilling until the cause was known was the equivalent of grounding all airplanes because of the first crash of one in a number of years. Add to this his blocking the Keystone pipeline project while offering to sell some of our supply of oil to China, and you have policies if not designed to restrict supply resulting in higher prices, then accomplishing this through ineptitude. It is rather laughable that the same people who accused President Bush and Vice President Cheney of working to make their friends in the oil industry wealthy managed to elect a president who has only made them richer still while he verbally demonizes them for prospering from his policies. Some refer to Westerns as horse operas. This performance appears to emanate from the other end of the horse.

  2. Becky (Campbell) Smith Says:

    Great article, Nancy!

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