Home » Economy, Inflation

Are High Oil Prices Good For The Economy?

29 October 2009 2 Comments

Many people on TV are debating whether or not high oil prices are a good thing or not.  I’m pretty flabbergasted by this discussion as a whole.  High oils prices are not good for the economy at all.  Especially with a wounded consumer, what on earth would be good about high gas prices?  As far as I’m concerned, the lower the gas prices and the price of oil, the better.  Sure, oil companies might not make as much money, but is that what we’re really concerned with?

Perhaps, a better question that whether or not high oil prices are good for the economy is the question of are high oil prices a good sign of the economy?  Many “experts” would say yes.  Why?  Because high oil prices indicate an increase in demand and economic activity around the globe or in other worlds a global economic recovery.

Interestingly, traders on CNBC’s show Fast Money were debating where is the best place for oil to hover around.  They agreed that oil should hover around $70 for an ideal situation.  Basically, if they stay high, then it means we’re recovering, but if they get too high they will be a drag on the economy.  Does this make sense to you?

If high oil prices are a drag on the economy, shouldn’t rock bottom oil prices help the recovery?  Then, wouldn’t you want oil to plummet?  But, then rock bottom oil prices would indicate a slow recovery.  Have I talked you in circles yet?

Inflationary Recovery

If the goal is an inflationary recovery, then yes I guess we would want oil to be high (but not too high).  I guess this argument falls in the camp with let’s have a weak currency but not a too weak currency.

If this recovery were fundamentally sound, I think the picture would look different.  But to get to this sound recovery, we would have to let the market sort itself out on its own, which it is very efficient at.  The result would probably be low, low oil prices (deflationary forces), possibly in the $15-20 a barrel range.  The dollar would be stronger.  The pain would be great from the recessionary forces.  But, isn’t the pain great right now?  At least for those not working in government or Wall St.?

If we let that happen, we’d be able to have a real recovery, based on innovation, production, new businesses.  Instead, we’re attempting to recover by re-inflating the bubble, but not too much.  As such, we’re left with this silly idea that we want oil prices to be high but not too high.  I think regular people with common sense should be in charge of this recovery instead of the so-called experts.  Oh wait, that would be called free-market capitalism.