On the oil-price shock, I say at least two cheers for higher prices. Why? Because I believe in markets. When the price of energy goes up, demand falls off and supply increases. This is the case today and it represents nothing short of a tectonic shift.
As Dan Yergin, president of Cambridge Energy Research Associates, recently wrote in the Washington Post, rising energy prices today will cause energy supplies to explode tomorrow. With gas prices moving toward $3 a gallon, the public is now even favoring nuclear power -- by two-to-one, according to pollster Scott Rasmussen. Nuclear energy is the ultimate solution for clean power and reduced foreign dependence. And with the government giving the Federal Energy Regulatory Commission the authority to override localities that oppose nuclear power, liquefied natural gas, or other forms of energy, the likelihood of an energy explosion in the years ahead is even greater. Markets work if you let them.
The spread of global capitalism to places like China, India, and Eastern Europe is the main cause of the spike in energy prices. It’s a market signal that the new and prospering world economy needs more power. Consequently, this is not a recessionary supply crunch like we had in the 1970s. It’s a growth-oriented demand increase.
This is why the impact of high oil prices has been negligible, at least so far. Since the end of 2003, energy prices have more than doubled. But in annual terms the economy is growing by nearly 4 percent. Jobs are up and unemployment is down. Using the most accurate inflation gauges, the overall price level has increased only 2.5 percent yearly, and less than 2 percent excluding energy. Bond rates remain very low and stock indexes continue to appreciate.
Lumber prices, meanwhile, are plummeting, which suggests a cooling off of housing construction and home prices. Wall Street economist John Silvia believes condo markets are at the front edge of this cooling, with condo inventories rising, sale times lengthening, and prices softening. Private markets, city-by-city, are making their own adjustments based on affordability and the price of credit. There won’t a crash, but there will be a well-earned slowdown. That’s not to say the housing boom hasn’t been a good thing. Like the oil spike, it’s a big positive. The wealth-creating economic benefits of increased home ownership and the real-estate rebuilding of inner cities have been huge.
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