America has no plan for what to do when an oil shock hits. Not only that, few if any discuss what could be done. Yet with a high risk of future volatility in markets, America needs such a plan.
Luckily, with the power of the Internet, policies can help Americans facing high gas prices get out of their cars to telecommute and virtually shop and communicate when prices skyrocket upwards again. And from experience, we know which industries tend to get hammered by high oil prices and can prepare to bolster them when needed.
Currently during oil price shocks, politicians tend to resort to rhetorical policy proposals that accomplish nothing in the short-run for consumers. The latest set include investigating price gougers or having a task force on speculation (even though the CFTC has offered proposed new rules that would be helpful but the administration has failed to implement them); thinking up ways to increase taxes of the five largest American oil companies; and jawbone on why oil drilling or investment in alternative energy should be higher.
The policy world hasn’t been much help in generating ideas. Jason Grumet of the Bipartisan Policy Center summed up the outlook in 2005 when he testified in front of Congress, “once a serious disruption [of oil] occurs there are no good near-term options.” He then proceeded not to mention what those options might even be. It’s no wonderPresident Obama said so little about what to do immediately in his late March speech about energy.
When it comes to an oil shock, the lever most frequently discussed is releasing barrels from the Strategic Petroleum Reserve (SPR), and we at the Baker Institute have strongly advocated that the government clarify its SPR policyand consider a test sale, perhaps through the U.S. futures market delivery mechanism. To view a video discussion of these options, click here.
Policy options don’t end at the SPR, however. In terms of demand, we should realize that the Internet makes a lot of traveling that would’ve been essential during in the 1970s oil crises much more flexible today. 90 percent of miles driven are for work, shopping or social reasons. With the Internet, telecommuting and finding others who want to carpool is easier, consumers can shop online, and Skype provides face-to-face communication without the need for travel.
These benefits can only be fully realized with supportive institutions, especially employers that help their employees to telecommute, carpool, shop collectively online and teleconference rather than hopping on a plane. As seen in this video, businesses can be encouraged and incentivized to offer these options to their employees, and some incentives could go to individual consumers. These plans would be put in place before an oil shock and then ramped up during one.
As for the economy, which frequently suffers during an oil shock, policies could help boost sales of goods that consumers stop buying, particularly autos. The Obama administration’s “Cash for Clunkers” program might have been useful in more than one way. The largest year-over-year auto sales declines occurred right after large oil price shocks, and energy price shocks generally have very negative impacts on a wide variety of industries but especially auto sales. The leading expert on the impact of oil prices on the economy, James D. Hamilton, frequently notes that all but one of the post-WWII recessions were preceded by a spike in oil prices. Yet he argues that if it weren’t for consumers avoiding auto purchases, it is unlikely there would have been recessions in 1980 or 1990-1, and the most recent recession would not have started until after Lehman Brothers fell. Sales this April look strong compared with last year, but with sales at an annual rate of 13.2 million, they are still abysmal compared with, say, 2007, when the industry complained about sales at their “lowest level in a decade” – at 16.15 million!
Simply put, we need a plan for when the next oil shock hits, and we can have one by preparing to use our SPR, harness the internet and target certain vulnerable industries.
Photo by kikashi.