Oil is nothing new to most Americans – after all, we’ve been drilling the stuff out of the ground for about a century now. Oil even did pretty well at the Oscars a few years back, in a story covering its early days here in the US. Oil gets used in just about every industry you can think of – transportation, home heating, electrical generation are easy to understand, but it’s just as central to agriculture, manufacturing, the high-tech industry, entertainment, education, etc., etc., etc.
However, its interesting to think of what Oil acts like, that may not be immediately apparent to even the most thoughtful: a tax
Oil and the economy — “anchors away!” or “anchors a-weigh?”
Oil as a tax on the economy. As noted in the analysis surrounding Friday’s improved job numbers, rising oil prices made a day that should have cheered investors (more jobs, less unemployment filings, increased consumer spending, etc.) one that instead made the market drop 88.32 points, after the price of a barrel of oil made it to $104. Rising energy costs act like a tax in the economy – it makes everything more expensive, and people buy less of it as a result.
The back-of-the-envelope data from Nariman Behravesh, chief economist at IHS Global Insight (from the same interview linked to above) is that every $10 increase in the price of oil corresponds to about a .2% or .3% drop in the GDP. …put another way, if oil continues to rise as it has so far this year, and it gets back up to $150/barrel, it has essentially wiped away one percentage point of GDP growth this year. …and we only averaged about 2.7% last year! That would be a bummer (if oil put a kibosh on our recovery).
[as a frame of reference, at its worst, the recent recession bottomed out in 2008 with a GDP growth rate of -6.2%.]
Taxes can be a huge drag
The price of oil affects prices all along the “food chain” of american commerce – higher oil prices make companies that buy oil (like gasoline) pay more to do the same amount of stuff. They, in turn, raise prices on their goods or services to help pay for their bigger oil bill. This acts as a very specific kind of tax, the Value Added Tax, which some people think is good, and others think is bad.
Good or bad, its worth thinking about inputs like oil as a tax, because that’s essentially how it acts. The real question, then, is what do we do about it, if anything? Will switching our economy away from oil (to other forms of energy) reduce the tax burden, and release the market from its chains? Or will some other form of energy simply take its place as a drag on the market? Thoughts?
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