Is Cheap Oil Bad?

Scrolling through Facebook this morning, I came across someone upset over the recent fall in oil prices. The source of their frustration was the layoffs and economic slowdown associated with falling oil prices in the oil and natural gas industry. The price of oil has indeed fallen, and the oil industry is undergoing a temporary bust as a result, but is that a bad thing?

This article from the New York Times offers a good explanation for economic reasons for falling oil prices. In short, the supply of oil has dramatically increased in recent years, especially from the United States. Additionally, OPEC is continuing to pump out oil, rather than artificially restrict output to raise the price, as they have done in the past.

The sentiment that low prices are a problem is not a new one. Frédéric Bastiat, a Classical French Economist, tackled the issue in his essay "Abundance - Scarcity". He noted that when prices are high in a particular industry, such as oil, those working in that industry benefit. This leads many to conclude that high prices are desirable in all industries, leading to tariffs, barriers to trade, and other means of artificially raising price.

Bastiat saw an inherent conflict  between producers and consumers. Producers want to sell goods for as high a price as they are able, and consumers want to obtain goods as cheaply as possible. However, he also noted that "Man is at once producer and consumer". Anyone in the oil industry, though they produce oil, also have to consume food, water, shelter, and so on. While it would benefit farmers or contractors to have the price of food and shelter high, it would not benefit those who consume what they produce. For any individual working in any given industry, it is almost certain that they consume far more, both in quantity and in diversity, than what they produce.

This was Bastiat's key insight. When prices are high for one industry, say oil, that leaves consumers less wealth to spend on other goods. Expensive oil may lead to growth and stability in the oil industry, but it comes at the expense of growth in any other number of industries. Every consumer of oil benefits from a lower price, just as every consumer of bread benefits from a falling price of wheat.

Bastiat saw wealth in the abundance of commodities, not in the money a select few might earn due to high prices.

"Men are not fed on money. They do not clothe themselves with gold, or warm themselves with silver. What does it matter whether there is more or less money in the country if there is more bread on our sideboards, more meat in our larder, more linen in our wardrobes, more firewood in our cellars."

Cheaper and more abundant goods means a wealthier society. Those who fear falling oil prices would do well to heed the lesson of Bastiat.