What Low Gas Prices Say About The Economy In the short term, cheap gas is a godsend. But in the long term, it's a disaster. How much lower can — or should — the price go?

What Low Gas Prices Say About The Economy

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SCOTT SIMON, host:

This is Weekend Edition from NPR News. I'm Scott Simon. Coming up, economical tips or eco-friendly gifts.

But first, oil economist Philip Verleger was on the show over the Memorial Day Weekend, when the price of a barrel of oil was about $130.We asked if he ever expected to see gas at $3 again.

(Soundbite of interview)

Mr. PHILIP VERLEGER (Oil and Energy Economist): Yes. In 1980, the oil prices were 40 and prices were high, and everybody said they'd never fall. Well, five years later, they were $10 a barrel. Commodity prices are very volatile, and if demand drops significantly and if refiners do many of the things they're planning to do, we could easily see $2 a gallon gasoline within four or five years.

SIMON: Philip Verleger joins us again. Good morning.

Mr. VERLEGER: Good morning.

SIMON: Well, you were right, except it was five months, not five years. What happened?

Mr. VERLEGER: Well, there's a rule in economics: Never put a number and a date on the same piece of paper. I violated that rule.

(Soundbite of laughter)

SIMON: Well, what happened, and is it unbridled good news?

Mr. VERLEGER: In the short term, it is unambiguously great news. What happened was prices were pushed up not really by a shortage but by a combination of bad policy in the United States and in Europe on the environmental side. Everybody wants to remove sulfur from diesel fuel, and we rushed into it. We did OK. The Europeans followed, and there wasn't enough supply.

So what you need is very sweet crude oil to make it. And the Department of Energy in August of 2007 started putting sweet crude into the strategic petroleum reserve, and it just created a very tight market. For a year - almost a year, they kept putting it in, and prices kept going up. They stopped at the end of July, and prices started coming down.

Now, the situation was exacerbated by the strong euro in the spring and - which pulled prices up. And then - so everything's reversed. Demand has gone down. The DOE stopped filling and so prices came back to around 70, which is where they belong. And now this horrible recession is probably going to take them down - it could take the price of crude down to $20 a barrel or below.

SIMON: Well, and of course, this will be good news, for example, for Americans driving to see family and friends during the holiday season. But are there - are there some other effects of the drop in oil prices?

Mr. VERLEGER: Well, yes. What this is, is equivalent to about a tax cut for consumers that's double or triple the tax cut we had last spring. It amounts to roughly 4 percent of consumer spendable income. So consumers who are seeing their incomes go down because they can't work as many hours or because wages are being cut due to the need to shift jobs and the recession are getting effectively a 4 percent boost in their income.

And that's why in the short term, it really is very, very good news. It will help bring the economy back a little. Now, high-energy prices didn't cause this recession, but they contributed. And now, the lower oil prices may contribute to a moderation of it.

SIMON: Well, on the other hand, do we have to worry about more people taking their cars? Or, for example, do we have to worry about the fact that more people buying oil now will just procrastinate problems building up in energy supplies anyway?

Mr. VERLEGER: Well, I think - I think not. I was in the Carter administration, and we came out of it with a good set of programs that would have led to much lower oil consumption today. And when Reagan replaced Carter in 1981 and Mrs. Thatcher came to really strengthen England, we saw all the kind of regulatory efforts that had been pushed officially abandoned.

This time, the good news is that we have a new administration coming that is thinking about global warming, thinking about the long term. And so we'll probably - we'll certainly take measures to cut energy use in the long term and get us back on track so that we'll get the short-term benefit of lower oil prices but we will not see the long-term, terrible impact of what we saw in the '80s, where we started rushing ahead with these SUVs and other - essentially forgetting about energy conservation. So I think it's good news in the short term, and because President Obama will be inaugurated in less than 60 days, good news in the long term.

SIMON: Philip Verleger, independent oil industry analyst and professor at the University of Calgary. Thanks so much.

Mr. VERLEGER: Thank you very much.

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