The Real Costs of Rising Energy Prices Are......

Thursday, January 3, 2008

The article, “Squeeze’s Effect is Amplified on the Less Affluent,” was published in the Wall Street Journal on January 3, 2008.

My Opinion: This article should be entitled: “The Real Costs of Rising Gas Prices.”

This article is a great representation of the economic costs of rising prices. As I argued in a related article, “U.S. Inflation Numbers and the Mortgage Market,” rising prices is not an economic cost. If prices rise quickly, and incomes are slow to adjust, purchasing power may fall for a time. However, as incomes adjust upward with prices, purchasing power (how much you are able to buy) remains unchanged – all is status quo. In the same respect, rising fuel prices will not be a significant long-run issue. Eventually, incomes will adjust upward’ paying for gas or running your business will not affect your decision-making process.

The problem is when rising prices, or in this case rising energy prices, cause consumers and firms to use resources in order to accommodate the rising prices. Let’s see what the article says:

1. Monique Blasko “just doesn’t feel as free to go.” She does not make the 50-mile trip to the museum. She exerts resources away from income-producing activities (paying for a service at the museum) for non-income producing activities (staying at home).

2. Paula Hall says, “There is plastic on every single window. A blanket on the back door and front door. And one to block the drafts.” She spends her money on plastic and extra blankets, instead on alternative goods (like groceries and clothing) in order to accommodate high energy prices.

3. Marsh Ponkey says, “Its crunch time.” This is in reference to her being laid off in November from her job at the Chrysler LLC plant in Detroit. She is collecting unemployment benefits for almost half of her lost wages. The government must reduce payments for goods and services (education or roads) and increase transfer payments (unemployment benefits), which takes away from production. For example, the road is not built.

4. Adam Robinson says, “Commodities are just so real and touch so many people all the time," He plans in a few years -- when he's 25, perhaps -- to become a "dealmaker in the energy space.” This is in reference him being jealous of classmate who took an internship doing research in the beverages and tobacco sector. He was forced to take an internship in the natural gas industry – an industry that is bursting right now. Due to the high oil prices, certain sectors (perhaps tourism and auto manufacturing) are suffering greatly, while other sectors (commodities) are thriving. If one gains much more than the other looses, this is an arbitrary distribution of wealth.

5. Joseph Reggiannini says, “When a customer runs out of oil in the middle of the night, I’ve got to be there. That is how you’ll keep your customers at these prices.” He says this in reference to working many extra hours fighting for the loyalty of his customers in the heating oil delivery service. He exerts much more energy when prices are high than when prices are low.

In cases 1.-5., all workers are suffering real economic costs to rising prices. The costs are:

Economic Cost 1: Cash-constrained individuals (those with little or no saving) are forced to lower consumption during times of high gas prices. These individuals live paycheck to paycheck and have to lower consumption of other goods in order to pay the high electricity bills. Those who are not cash-constrained keep consumption the same by taking money out of saving in order to pay for the high energy costs. Monique and Paula suffer from this cost.

Economic Cost 2: Rising unemployment benefit payments take away from other expenditures. In this case, resources are used to pay for non-production goods like unemployment insurance. Marsh illustrates this cost.

Economic Cost 3: Arbitrary redistribution of wealth. Certain industries suffer (tourism or auto manufacturing), while certain industries gain (petroleum drilling). As long as the value of the suffering is greater than the value of the gain, then an economic cost arises. Adam illustrates this cost.

Economic Cost 4: Over-utilization of resources to accommodate the price increase. Joseph works extra hours when he could be doing other activities better suited during that time – this is an economic cost. On an aggregate scale, allocating resources to accommodating the price increases and away from production (let’s say going to the museum) is an economic cost. Monique and Joseph illustrate this cost.

Do you have any comments? I welcome your feedback. Nontruths


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