Thursday, August 1, 2013

Economy: How High Oil Prices Shape The World Around Us

(Drivebycuriosity) - The price of oil is rising again. It seems that the low energy prices, which had bolstered the global economy in the 1990s, are history (.wikipedia  gasprice). Now the world around us is getting shaped by the increasingly expensive energy .

Gas prices at U.S. pumps are close to $4 for a gallon. This is a response to the oil price which is hovering north of $100 a barrel. In the year 2004, after almost 2 decades of cheap energy, the price of oil started its sharp rise and peaked at $147 in 2008 (forecast-chart). After a severe setback in the second half of 2008 the oil price jumped again. Today oil costs around 3-times its average price in the 1990s!

The high oil price is slowing down the global economy because consumers have less money to spend for other goods, thanks to gasoline bill, heating and transportation costs which make many goods more expensive.  And companies have to deal with higher costs. Hence the expensive oil is partly to be blamed for the lamented slow recovery of the world economy since the 2008/09 recession.

But there are other outcomes that even might be positive:

Less Driving

A new study by the University of Michigan shows that American motoring - as measured by miles driven - peaked in 2004 ( Hence this number started to fall in the same year as oil & gas prices began their steep climb. I reckon that this is not a coincidence. High gas prices spoil the fun of driving, they also make driving less affordable. At least people with a tight budget have to cut back driving.

But there are some positive outcomes. Less driving reduces the emission of car exhaust which is good for the whole environment and the health of everyone. It also prompts less accidents and people have more time for other things. Hence less driving might lead to a higher quality of life.

Back to the cities

Another study shows that the population of rural and small-town America contracted over the past two years (drivebycuriosity). An analysis of US Census Bureau data by the Department of Agriculture also found that people in their 20s and 30s were migrating away from the rural areas and were moving to large cities.

I reckon that the high energy costs are - at least parlty - the cause that people are returning to the cities. In the 80s and 90s -  as gas was cheap -  it was affordable to move into the suburbs and to commute to working places, shops and leisure spots far away. Now the high gas costs are punishing the population in the suburbs and the rural areas. 

In a time of high gas prices it pays to return to a metropolis like New York City, where the commuting ways are much shorter and public transportation systems (buses & subways) are relatively cheap.

If high oil prices lead to denser cities (to avoid commuting costs) they could be a remedy for the suburban sprawl, that transforms greenland into vast concrete areas.

Both trends, less driving and the return to the cities, could ease the negative effect of high oil prices on the wallets and could mitigate the headwind for the global economic growth in medium-term.

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