Energy Prices and Economic Growth

One thing with which nearly all economists agree is that the price of energy is a critical factor in determining the rate of growth in the US economy. Oil prices spiked dramatically in 1973 and this was followed by a recession and stagnant growth for a number of years. Oil prices also rose dramatically in 1990 when Iraq invaded Kuwait. Although the USA successfully led a coalition force that ousted the Iraqis, the resulting disruption to the world oil flow led to price increases that spawned another recession. In 2008, oil prices rose to record levels close to $150 per barrel. The recession that hit the world at the point has been blamed on the subprime mortgage meltdown, but there is a good case to be made that it had as much to do with the high price of oil as it did with the mortgage panic. The simple truth is that when oil prices get too high, consumers cut back on other spending and the economy falters.

This relationship between energy prices and economic growth presents a major problem for the US economy. Right now, oil is at the highest price in a few years, right around $100 a barrel. There are a few special factors causing the current price. These include the temporary shutdown of the Alaska Pipeline and some difficulties in Norway. Such problems will soon be solved. There are also major long term problems which remain to be addressed. Much of US oil production comes from off shore wells and drilling of new wells has been frozen by Obama and the Obamacrats for the last six months (and there is no end in sight to the freeze). Land owned by the federal government has also been removed as a possible drilling site by decree of the president. In short, Obama and the Obamacrats have acted as if big oil companies are the enemy rather than the means by which the USA gets the energy that it needs to grow.

Beyond the attacks on the oil companies, Obama and the Obamacrats have also done all in their power to drive up the price of other energy or to discourage its production. The coal industry may have sidestepped the cap and trade bill pushed by Obama and his party in the last Congress, but the battle has now moved on to the EPA which is seeking to impose by regulation the same restrictions on coal that congress refused to pass. If such regulations are enacted, the price of energy from coal will, in Obama’s own words, “necessarily skyrocket.” For natural gas, which remains inexpensive and abundant in the USA, the Obamacrats have tried to stop the use of hydraulic fracturing to allow for gas extraction from the many shale deposits that contain reserves sufficient to supply US needs for many decades to come. These efforts have been successful in the state of New York in stopping all production from the Marcellus Shale, the largest of the new shale deposits. There are worries that the EPA will also get involved to stop this kind of drilling across the nation.

With the economy in such a fragile state, it is almost criminal that the president and his party would try so hard to curtail production of domestic energy resources. If the prices rise just a bit more, we may yet see the double dip recession that was the subject of so much fear in the second half of 2010. It truly amazes me that with Obama preparing to spend a billion dollars to get re-elected, no one on his staff can explain to him that his energy policies are likely to cause his defeat. If high oil prices continue and we hit a new recession, no amount of campaign spending will save Obama. He should be promoting the production and use of the massive new natural gas deposits rather than letting his party thwart their development. The technology is there already to have vehicles run on natural gas, a move that would reduce the need to import expensive oil while reducing pollution in a major way. Unfortunately, the Democrats surrounding Obama and the president himself seem to have bought into an ideology that says that only wind and solar energy are “good” and all power from fossil fuels is “bad”. If they keep it up, however, they will discover that the election results in 2010 were “good” and those in 2012 will be “bad”.