For decades, it has been touted as Gospel that low gas prices are good for the American economy, high gas prices can ruin it, and the price of gas will affect elections. Therefore, it followed that politicians and policymakers did everything they could to bring the price of gasoline down. Unfortunately for them, the price of gas is largely irrelevant to the actions of American politicians. In the short term, it depends on the vagaries of global market forces, actions by foreign governments, and geopolitical tensions. In the longer term, it depends on technological advances, the development of alternatives, and global economic growth. Nonetheless, this has not stopped American politicians from either placing blame or taking credit for gas price fluctuations.
However, the great American energy revolution of the last decade has upset the received Gospel about gas prices. Today, we see a prime example of how the low price of gasoline is no longer simply a boom to everyone. As a part of his national tour to tout the growing economy, President Obama will visit the Detroit suburbs to tour Ford’s “Michigan Assembly” plant. Normally, the plant employs about 5,000 people to build the compact Focus and C-Max, building each model in their hybrid, plug-in electric, and gasoline versions. As small, fuel efficient cars, these vehicles have seen their sales slump over the past few months as the price of gasoline has fallen. So, as a consequence, the plant has extended its holiday break, and the President will tour a plant that is idle.
One would hope that the American consumer wouldn’t be so short-sighted as to base a major purchase – one that could affect their personal economic health for five years or more – on short term fluctuations in gas prices. However, the evidence shows otherwise: Americans are buying less efficient vehicles. In December, new passenger vehicles sold in the U.S. got an average 25.1 miles a gallon, down from 25.3 mpg in November and 25.8 mpg in August. Luckily, even with changing consumer preferences, good government policy – whereby the Corporate Average Fuel Economy (CAFE) standards have been raised – means that even if Americans are swapping hybrids for pickup trucks, those trucks are much more fuel efficient than they were only five years ago.
The great American energy revolution of the last decade is not simply a story about the fracking boom that has unlocked a glut of shale oil and shale gas. It is also about an efficiency revolution that means we can do more with less energy. It is also about a boom in renewable energy and technological advances allowing us to separate energy use from greenhouse gas emissions.
However, for this revolution to continue, we need stable energy prices. As I wrote in “America’s Energy Choices,” price fluctuations can be more harmful to long-term economic growth than simply high prices.
“Low prices at the expense of little buffer against fluctuations in price – both up and down – can be more harmful than a higher price that is stable over the long-term. Upward price shocks harm consumers by acting as a tax, but downward price shocks can harm producers as well by undermining long-term investments. When prices are low, consumers are encouraged into dependency, only increasing the economic damage if prices spike upwards.”
For decades, American policymakers have tried to bring down the price of energy (especially gasoline), but the result has been to make both consumers and producers vulnerable to an ill-functioning market that is impossible to plan for. Instead, American policy should be to encourage price stability over the long term. A good first step would be to institute significantly higher gasoline taxes: when taxes make up a larger proportion of the fuel price (as in most European countries), the daily market fluctuations are proportionally smaller.
Unfortunately, we shouldn’t expect such a sane policy in today’s partisan environment. Until we build policies around price stability, however, we will see examples like this: the President visiting an idle factory built for yesterday’s energy prices, not today’s.