Eller Economists Focus on Oil Prices

Feb. 26, 2015
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Price Fishback

Those who came to Tuesday night’s panel discussion at the Eller College of Management seeking a definitive answer to its central question went away enlightened and entertained — but perhaps not encouraged.

"Plummeting Oil Prices: Good News or Bad?" got the best shot of University of Arizona economists Price Fishback, Mike Staten and Dirk Mateer in a fast-moving, thoroughly engaging 90 minutes of ripped-from-the-headlines commentary that also had enough charts, graphs and bullet points to satisfy any geek.

Fishback led off by supplying some historical perspective on oil’s role in the American economy, then Staten talked about the impact of falling oil prices on the consumer. Mateer wrapped it up with a "predicaments and predictions" segment, joking that his listeners undoubtedly would return in a few years to remind him of how wrong he was. The panelists took a half-hour of questions from the audience afterward.

The answer to the good-or-bad question "depends on where you sit," said Staten, of the UA’s Norton School of Family and Consumer Sciences.

"We’re a complicated story," he said of the U.S., noting that the country is the largest consumer and producer of oil in the world but also its largest importer. Because the U.S. is a net importer, dropping prices represent a net savings to the economy, he said.

However, little payoff has been seen yet in consumer retail spending, except for gasoline — and even that hasn’t been too significant. Figuring that the average household buys 600 gallons of gas a year, paying $1 less per gallon than a year ago, Staten said this amounts to a savings of about $12 a week, hardly enough to help much with big-ticket purchases.

"The impact (of lower gas prices) takes time to be visible," Staten said. "Spending patterns won’t change until consumers are sure the lower prices will stick." And indeed, prices at the pump have been creeping upward of late.

Savings may be greater in the eastern U.S., Staten said, where fuel oil is still used for winter heat in many places. He said the lower oil prices can be attributed to three things: expanded U.S. production, particularly in shale oil ("the story that has crept up on most of us"); weakened demand elsewhere in the world; and political instability in places such as Greece, the Ukraine and the Middle East.

Staten said cheaper airfares aren’t likely in the near term, eliciting audible disappointment from the crowd. He said that’s because hedging on fuel costs has blunted the savings of the airlines. He said lower oil prices might justify finally raising the gas tax, which was originally intended for the road repairs now desperately needed in many parts of the country. Although vehicles have become more fuel efficient over the years, they impose the same wear and tear on highways and streets.

Fishback observed that oil was once an alternative fuel in the U.S., finally supplanting coal in the late 19th century. He recalled the gas lines of the 1970s, when OPEC doubled world oil prices twice, from $20 to $100 a barrel, and the American economy was sent reeling by the stagflation of high unemployment and high inflation.

"Inflation is your friend," he said tongue in cheek, quoting an old "Saturday Night Live" skit in which actor Dan Aykroyd played then-President Jimmy Carter.

Mateer, like Fishback a professor in the Eller College, said the question for the immediate future is whether OPEC or the U.S. "will blink first" in a stare-down. Prices will stay low if both maintain production, but they will go higher if both cut production. The economic advantage will go to the one that maintains production while the other reduces it.

On the one hand, OPEC has a production cost advantage and may be better equipped to play a waiting game. But on the other, the economies of OPEC countries are far more dependent on oil than the U.S. economy is, and lower prices can bring pressure to bear on them.

"I don’t know who’s going to blink first, but some countries will blink earlier than others," Mateer said, mentioning Venezuela and Russia as two that have particularly oil-centric economies.

Mateer did say that the lower oil prices won’t last, although he wasn’t willing to guess at an expiration date.

"Two hundred dollars a barrel could come in three, 10 or 20 years," he said. "Oil is a scarce commodity and it’s perishable. There will be a tipping point, and we will make the switch to more sustainable forms of energy.

"We will encounter really high oil prices again at some point. It’s going to happen. The moment will come."