Falling Oil means Increased Spending... Right?

Bill Tatro
Posted: Dec 18, 2014 12:01 AM
Falling Oil means Increased Spending... Right?

I once, at 17 years old, kept the President of the United States waiting as I struggled with the concept of productivity. My Professor, the Economics Adviser to LBJ, graciously took an extra 20 minutes after class to try to explain his Keynesian thought process. Unfortunately, to this day, I don’t get what you do with the people you just put out of work other than hand them a food stamp card.

Fifty years later I am struggling with another concept, being espoused by economists, central bankers, politicians, mainstream media and even the majority of talk show hosts.

  1. The idea that falling gas prices will put more money in consumer’s pockets.

  1. For every $10 drop in oil GDP increases by 1/10th of a percent.

Let’s start with the concept of more money in one’s pocket. Example: I have a 20 gallon tank and decide to filler-up at $4 per gallon. I carry $80 in cash in my pocket and after I revive from the shock all $80 has been passed to the service station attendant leaving me with zero.

Gasoline is now $2 per gallon. Once again I say filler-up with the same 20 gallon tank and also with the same $80 in my pocket. This time, however, I pass over only $40 to the station attendant. With my remaining $40, and it being Christmas, I decide to stop and buy an electronic toy marked “Made in China”.

Once again I return home with zero in my pocket. Instead of buying one item with my $80, gasoline, I bought two, gasoline and a toy. I didn’t have any extra money as it has been stated. I just was able to buy more things.

It is all a zero sum game which takes away from one to give to another.

The idea that it increases the GDP also confounds me. According to the Energy Information Administration only 21% of all net energy to be used in 2015 will come from imports. That means that 79% of our energy needs will be provided domestically.

Here’s my question. How does our GDP grow if the spending has been diverted from 79% of it staying home and supporting domestic energy companies to the majority of it going abroad and supporting an international manufacturer?????

It would appear that smarter folk than I have figured this all out but remember I’m still struggling, after 50 years, with why high productivity resulting in high unemployment is a good thing.