Rising oil prices typically receive about the same welcome as the annual visit from one's mother-in-law. Both spell trouble.
In the case of oil, however, trouble is exactly what we have gotten in the past. Since World War II, nearly every U.S. recession has been preceded or accompanied by a sharp rise in energy prices.
That fact, combined with the length of the current economic expansion, has led some to predict a recession on the near-term horizon. But two factors lead me to believe things might turn out a little different this time around.
The first factor is the increasing productivity of the U.S. economy. For about five years now, output per worker has been rising dramatically, the result of advances in computers and telecommunications, which have lowered the cost of information-gathering and retooled our production and distribution processes. One consequence of this retooling is that our production processes are more energy-efficient than ever before. The energy efficiency of air conditioners, for example, has nearly tripled since the early 1970s. Similarly, the fuel economy of today's autos is double what it was 25 years ago. Overall, we're a little less susceptible to energy price hikes than we used to be.
The second factor is better monetary policy. Since the late 1970s, the Federal Reserve's monetary policy has been aimed squarely at controlling inflation. Today, it hovers around 2 percent to 3 percent (after accounting for the temporarily high oil prices), where it has been for several years. Market participants, convinced that the Fed is serious about keeping inflation low, now spend their funds on productive investment rather than on hedges against future inflation.
It seems clear then that the U.S. economy is well equipped to weather the current spike in oil prices—so well equipped, perhaps, that future spikes in oil prices may also cease to be a worry.
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