TCS Daily


Drivin' and Not Cryin'?

By Nick Schulz - April 28, 2006 12:00 AM

When it comes to gas prices, the media too often know the price of everything and the value of nothing.

Flip open a paper and turn on the TV and you'll learn that gas prices are rising again. "Stormy 6 Weeks Ahead" says CBSNews and warns consumers to expect "pain at the pump." Further surge in gas prices expected" says MSNBC. "Summer is approaching - and gas prices are already climbing," MSN Money tells us. Crude oil recently topped $70 a barrel. The culprits include rising demand -- thanks to a booming American economy, as well as robust growth in China and elsewhere -- pinched supplies, instability in the Middle East and Nigeria, and uncertainty over future crude prices.

But what's more interesting about these stories is what they don't tell you. For example, AP reports that "surveys indicate drivers won't be easing off on their mileage, using even more gas than a year ago." Now why is that? If prices are rising, one would expect consumers would use less.

The answer might be in some of the long-term trends that the short-term media lens is too cramped to see. While energy prices may be rising, energy itself is much less important to consumers and to the overall economy than it once was.

According to the Bureau of Economic Affairs (see chart here), American consumer spending on energy as a fraction of total personal consumption has declined considerably since 1980. Whereas 25 years ago, one in every ten consumer dollars was spent on energy, today it's one in every sixteen bucks. In other words, what it takes to heat and cool our homes and drive to and from our jobs and vacation destinations is relatively less costly than it once was.

This goes a long way to explaining why even while gas prices rise this summer, and while they will be higher than they were through the 1990s, people will still be driving more -- it's much more of a value than it was a generation ago.

What's more, so-called energy intensity is declining rapidly. That means we produce more with less energy. According to Economy.com, "The U.S. economy has undergone major structural changes over the last two decades, becoming more energy efficient, thus reducing its overall dependence on energy... The energy intensity of the U.S. economy has declined by roughly 40% since the first oil crisis" (as of 2001). (See Economy.com graph here.)

These trends are healthy ones for the economy. They also put the lie to President Bush's recent unwise rhetoric about America's oil "addiction." The nature of addiction typically is that it becomes all-consuming, eating up a greater share of one's life and livelihood. But the long term trends of American consumer spending reflect something different -- energy is becoming less important over time to the overall economy.

Of course, no one likes to pay higher prices at the pump. And our political class, in a bi-partisan tizzy, is threatening to do something -- raising taxes, cutting taxes, more regulation, less regulation. But the price mechanism, even when it acts in ways we don't like, is something we monkey with at our peril. It serves a critical function by sending information signals throughout an energy market that is global and highly competitive; these signals help determine where best to allocate capital to increase supplies. The last things needed at this point are political maneuvers that will distort and warp these signals.

The energy market is already badly and inefficiently regulated as it is, a mish-mash of tax breaks, government subsidies, taxes and regulations. Almost everything being proposed from President Bush to Sen. Dick Durbin on down -- subsidies to alternative fuel sources, changing CAFE standards, tax breaks as well as windfall profits taxes -- would make a bad regulatory situation much worse.

With some analysts predicting oil per barrel going up to $75 or higher in the near future, we might see retail prices to go up further still. But unlike a generation or two ago, these increases will unlikely prompt the broader economic pain they once did. That's something to be happy about. So now's a good time to take a deep breath, go for a long drive -- and think about how bad government policies contribute to what we're already paying at the pump.

Nick Schulz is editor of TCS Daily. An earlier version of this article appeared in Forbes.com.

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