THE BENEFITS OF HIGH FUEL PRICES
Western Colorado Progressive, April 10, 2010
By Tom Phillips
High fuel prices are generally viewed as bad for the economy since they take money out of the pockets of American consumers which in turn reduces their trips to the mall. This in turn drags down the US and world economies since consumerism is a huge part of global economic activity.
But are there any benefits of high fuel prices? How about more manufacturing in the USA? During the past few decades, globalization has dominated the global economic landscape. Globalization has some good points. It makes nations interdependent on each other which in turn, it is argued, reduces the probability of war. But has it gone too far? Has it driven investment out of the USA to other countries all over the word? Has is caused us to neglect our infrastructure as we invest money and chase profits offshore instead here at home?
Although labor is cheaper in some overseas locations, it is cheap transportation fuel that enables this high degree of globalization to work. Without cheap transportation fuel globalization slows down, and goods manufactured locally begin to compete once again with goods made far away in a cheap-labor country.
Here?s a real life example. IKEA recently opened the doors of a 930,000 ft2 manufacturing facility in Danville, VA. One of the main reasons for this move was to reduce the transportation cost of moving heavy furniture into the US from abroad. This trend will continue if, and only if, fuel costs remain high.
High fuel prices also make food grown locally more economical than imported food. Arguably, high fuel prices could help bring back the small local family farm. Doesn?t it make sense to encourage both local food production and local energy production, two of our most basic needs? Won?t this make us more secure?
As we live more locally, grow our own food, share rides and prepare more home cooked meals, a renaissance of true family values may re-emerge. How will history view this era where a majority of us spend hours each day alone in our cars? High fuel prices will indeed usher in a new, and better, social order.
High fuel prices will also encourage more of us to walk and ride bicycles. This increased level of exercise combined with increased consumption of locally grown meat and produce combined with cleaner air will undoubtedly make this a healthier nation and reduce the cost of health care.
A whole new segment of the US economy will flourish in alternative energy if, and only if, fuel prices remain high. This would include wind, solar, biofuels, and nanotechnology to name just a few. Growth in this area will add millions of new jobs here in the USA, but our capitalistic economic system will withdraw investment in these alternatives if fuel prices drop too low.
The American automotive industry is on the verge of a historic shift to hybrid, electric and natural gas vehicles that could revitalize this ailing segment of our economy, but it will all be for naught if fuel prices fall too low. Again capitalism, which is inherently short-sighted, will withdraw support if fuel prices fall.
High fuel prices have resulted in a huge reduction of gasoline use here in the USA. This in turn has reduced our reliance on imported fuel which in turn has benefited our balance of trade deficit. This trend, which is undeniably beneficial to the USA, will continue If, and only if, fuel prices remain high.
The only force that reliably affects fuel consumption is price. Intellectual concepts such as energy independence and ?the largest transfer of wealth in the history of the world? (leaving the oil consumers and going to the oil producers) are too nebulous and too distant and do not immediately affect the consumer. Whereas we see the impact of price every time we fill up.
Capitalism is not perfect. It has one fatal flaw: a focus on short term profits and an inability to see the future value of our limited natural resources. Present (immediate) value drives all business decisions. If some project or investment is better for the company or the country 30 years from now but adds no value today, it has no chance of attracting investment.
It was clear a long time ago that our dependence on imported oil was bad for the country long term. It was also clear to the foreign oil producers feeding our addiction that capitalism would not invest in alternatives unless there was an immediate (present) value to such investments. It was therefore in their best long-term interest to keep the price of oil below this ?alternatives investment threshold? for as long as possible. It can be argued that the foreign oil producers ?capitalized? on this weakness of capitalism.
But in 2008 global demand outstripped supply and oil prices ran up. Because of this tight supply situation, the oil produces could no longer control price. However, as new oil increments come online in Saudi Arabia and elsewhere, and if demand continues to fall due to a prolonged global economic slowdown, prices could once again drop to low levels, and the producers will once again be in control. Demand will then rebound, alternatives will no longer be economical, our dependence on foreign oil will go even higher and in just a few short years, when peak oil is no longer a debate, we will find ourselves in a much, much worse situation.
It takes 20-30 years to make a significant change in the form of energy we use for transportation. Since capitalism only looks at ?present? value, there is no way private industry will invest in time to make the necessary changes. That?s because alternatives have no present value when fuel prices are low and by the time fuel prices permanently rise to high enough levels it is too late. In the case of energy, the market will not work to avoid a catastrophe that could easily dwarf the great depression. Buy the time the myopic market sees the problem and begins to respond, it will be way too late.
The government has a role here. We need an energy policy that looks at least 50 years ahead and puts in place mechanisms that recognize and overcome the short-sightedness of the market. In order to allow the market to work, government must put a floor under the price of petroleum-based transportation fuels here in the USA. This could take the form of a consumption tax that would be levied only on non-renewable fuels. This would have the effect of placing a price floor under all transportation fuels, renewable and non-renewable. Once this floor is in place, businesses could move forward on their own, without government subsidies, with the development of economic alternatives. Without such assurances we will not be able to secure our energy future. The market just won?t be able to do it, given its understandable inability to invest for the long term.
No doubt such a consumption tax would hit the less fortunate members of our society much harder than the well-healed. This effect can be offset by a reduction in withholding tax and/or carefully designed tax credits. Giving the tax back to the low income earners keeps them whole while still discouraging fuel consumption because regardless of any tax rebates, filling up would still be a thought provoking experience.
Can any politician get elected on a platform of higher fuel prices? Unlikely. If the American public is just as short sighted as is American business, then we will not be able to avert this crisis. On the bright side, maybe the post-apocalyptic form of capitalism that will emerge will be much improved and driven by something other than present value. Perhaps present value will not reign unchallenged but instead will have to compete with the future value of our limited natural resources.
At least in the case of energy, government has a role to play in securing our future. Let?s hope that our government has the courage to do the right thing and not just the thing that improves the politicians ?present? value. Our future depends on it.
http://www.wcprogressive.com/2010/04...h-fuel-prices/
what of the economic fallout when goods and services rise like super inflation? 
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