It’s hard to hear, but we should actually celebrate higher gas (NYSE:UGA) prices at the pump. If we revisit macroeconomics 101, we’ll remember that gas prices are determined by our old friend supply and demand. If prices go down, that means demand is down, and that’s actually the sign of a worldwide decline in economic activity.
The Atlantic’s Derek Thompson cites the decline in gas prices that occurred about six months ago, “What assisted in the price slide? Well, China (NYSE:FXI) slowed down, India slowed down, and Europe watched its weaker economies slow-walk into a depression. As a result, Americans are enjoying a 50 cent-per-gallon discount on March gas prices — although that is still about 40 cents above 2010’s average. It’s coming at the price of some extremely worrying developments across the world.”
The U.S. accounts for about a quarter of the world’s crude oil demand, so our economic activity does have some bearing on oil (NYSEARCA:USO) prices, but our success still throws us into a vicious cycle: activity increases in the U.S., we use lots of oil, oil prices go up, price of oil hampers activity, activity goes down, oil prices decline and then it begins again.
How do we break this vicious cycle? Thompson summarized a solution proposed by Dan Indiviglio in which the U.S. government would set an average gas price ceiling while the economy is struggling and subsidize the difference between the actual cost and the ceiling. “Just one problem,” writes Thompson, “subsidizing gasoline in a recession with billions of deficit-financed dollars is the miraculous sort of policy that would piss off environmentalists and conservatives.”