The Oil Price Debate
June 13, 2008
Don’t be fooled by what you hear during the presidential election on how the country should address rising oil and gas prices, says USC Marshall School economist Tom Gilligan.
No matter what the Democrats or Republicans say, when it comes to oil there is only one, simple economic principle at work.
“If you care about the price of something, you can either limit demand or increase supply,” says Gilligan.
“That’s the basis of most public policy debates on the economy: Republicans usually push ways to increase supply, while Democrats usually say we need to cut demand. The truth is, we need to do both,” Gilligan explains.
That said, oil prices get a lot of public attention, and some voters experience very real financial consequences when oil goes up. “High oil and gas prices amplify the natural division between the candidates,” notes Gilligan.
“The people who really get hammered by the high cost of gas — i.e., people in low-wage jobs — will vote for Barack Obama anyway,” he says. Gilligan isn’t convinced that high gasoline prices will sway other, more affluent voters who have options such as telecommuting.
“Although the nation still depends a great deal on foreign sources to satisfy current oil consumption, energy costs represent a smaller share of the economy today than was the case in the 1970s,” he says. He points out that the service sector of the economy has grown exponentially, giving workers in many industries more options to conserve energy by working from home, holding online meetings and the like.
In addition, in cities across America, urban infill projects are becoming economically and socially viable, increasingly bringing far-flung commuters closer to city centers. Over time, Gilligan says, this will help increase energy efficiency.
Regarding oil prices, Gilligan says the global market is very efficient in pairing prices to the supply/demand curve, and the current price of oil — upwards of $130 per barrel — reflects the world increase in demand brought on by economic growth in places like China and India.
The hit Americans feel comes from two sources: Not only are prices up in general, but we must buy oil in dollars, which are now weaker relative to other major currencies. “The weak dollar probably accounts for about 10 percent to 20 percent of the price we pay here in the U.S.,” Gilligan explains.
Tom Gilligan, holder of the E. Morgan Stanley Chair in Business Administration at the USC Marshall School of Business, is an expert on pricing strategies and microeconomics.
Contact him at (213) 740-6531 or gilligan@marshall.usc.edu.