Rising crude prices tap into a barrel of nonsense | BrainerdDispatch.com | Brainerd, Minnesota

Rising crude prices tap into a barrel of nonsense

Posted: March 1, 2012 - 5:59pm

NEW YORK — There is nothing, and I mean nothing, like rising crude-oil prices to make sensible people go all wobbly in the head. Economists fail to differentiate between cause and effect. They confuse a supply shock with a shift in demand and see the outcomes as interchangeable. And they can’t see beyond the immediate negative impact on the consumer.

When rising oil prices coincide with an election year, people start spouting utter nonsense. It never changes. In fact, the script follows a predictable template:

Act I: Oil prices rise. Then they rise higher, surpassing the $100-a-barrel mark, as the threat of a potential supply disruption prompts real and speculative buying. Gas prices head toward $4 a gallon.

Act II: Enter the politicians to blame whichever party holds the White House at the time. The media report that households are feeling the pinch, forced to choose between feeding the family and filling the tank.

Act III: Economists warn of the negative impact of higher oil prices on a fragile economy. They produce model-based estimates of the effect of every $1 increase in the price of oil on gross domestic product.

Act IV: The president comes under pressure to “do something.” In the short run, this means a cosmetic release of oil from the Strategic Petroleum Reserve, an emergency facility that politicians view as a slush fund.

Act V: The global threat to supply recedes, oil prices settle back to normal, and everyone files the script away for the next revival.

In the current reprise of “Crude Oil Rising,” Act IV is just beginning.

CAROLINE BAUM, author, and Bloomberg View columnist.