When I decided to leave my post as White House economist, President Obama was kind enough to take an exit photo with my family. It so happened that gas prices were surging at the time, and my wife and I were discussing how Republicans were blaming this on the president. My 11-year-old daughter asked, reasonably (she’s a political economist’s child, after all), “Why does the president get blamed for higher gas prices?”
Great question, I said. Ask him! Which she did, which cracked up Obama — I think he was happiest back then when he was interacting with children — and he basically answered, “I know, right?!”
President Trump feels differently about this, at least when oil prices are tanking, as has been the case recently. By the end of last week, the price of a barrel went from correction to bear territory, the latter defined as at least a 20 percent drop in price. In fact, oil prices have fallen for 10 consecutive days, the worst such streak since 1984.
Trump claimed credit, saying last week, “I’m driving them down.”
He’s wrong, of course, as oil prices are set in global markets through the decisions of cartels and market forces. The recent price decline is due to increased supply as the Saudis, the Russians and the United States pump near-record amounts. Trump was referring to waivers from sanctions that the United States granted to eight countries importing oil from Iran, but his move doesn’t appear to have hastened the downward price trend.
From an economic perspective, such low oil prices are a mixed blessing. Obviously, they’re a boon at the pump, and because less money in your tank means more spending elsewhere, falling oil prices lead to faster growth.
That correlation has fallen, however, as we produce more energy domestically. Now, when the price of a barrel falls below the profitable price point, domestic production shuts down, leading to mini-Venezuelas in oil-patch areas such as parts of Texas and the Dakotas that sink or swim based on the price of oil.
Also, as I’ll get to in a moment, cheap oil means that the price of energy is too low given its negative environmental effects. It means the market cost is below the social cost.
Yet, Trump is on to something that could, if oil prices stay low, become a big economic deal in coming months: The cost of energy, for now, is a significant factor in real wage growth, which means real wages may start to post some significant gains. The figure below shows the effect of energy costs on the real-wage growth of middle-wage workers. The last time real-wage growth was consistently strong, in the 1990s, the correlation between these two variables was low (0.3, where 1 is perfect positive correlation). Over the past decade, it has stood at 0.9.
So, what’s not to like about $60-a-barrel oil?
Well, there’s the fact that it’s melting the planet. That’s hyperbole meant to get your attention, but the fact is that cheap oil is totally inconsistent with sustainable growth. This creates both a potential crisis — one that is already playing out in the accelerated effects of global warming, including the increased frequency of intense storms — and a potential opportunity.
Though the midterm election outcomes were mixed for action on this issue, the House, state governors and state legislatures now have many more policymakers who are seriously concerned about climate change. That doesn’t mean a national carbon tax is suddenly viable, but it does mean a more rational, political discussion of actionable, incremental steps can begin.
For example, I’ve long argued on this page that we need a higher federal gas tax, which is, for the record, a carbon tax. The U.S. fleet is much more fuel efficient, and, of course, prices have gone up since 1993, which was the last time it was raised, to 18.4 cents per gallon. Moreover, there’s at least some bipartisan support for the idea. For example, I’ll bet you didn’t know that the U.S. Chamber of Commerce supports an increase of 25 cents in the gas tax. (For what it’s worth, which I suspect isn’t much, Trump himself occasionally agrees.)
The tax would be a smart way to pay for the infrastructure program that I believe House Democrats will soon introduce, and, if the current trend persists, what better time to phase it in than when oil and gas prices are low?
What about the regressive aspects of such a tax, given that it falls harder on lower-wage people, not to mention the wage effects documented above? This is a problem with any carbon tax, but it is one that is solved by rebating some of the revenue raised by the tax to low-income households. This will also help to offset any negative wage effects.
Again, I’m not at all claiming that Tuesday’s results are anywhere near enough of a game-changer to usher in what I think is such a forward-looking — albeit incremental — policy change. But I’m very much claiming that the results are sufficient to begin an adult conversation about the under-priced social cost of fossil fuels, its effect on our survival and the policy agenda to fight back.
Let that conversation begin!