OIL APPEARS to be the problem that will not go away. Just last weekend when I went to fill up my tank for the return drive to Charlottesville, gas was selling for $3.50 a gallon, down from $3.70. While it is easiest to observe the pitfalls of our economy's reliance on oil when we are pulling out our wallets at the gas pump, the effect of higher fuel prices on inflation and global economic growth is the truly disconcerting trend. To insure the United States' economic future, our political leaders need to break the American addiction to oil.
A recent article in The Economist, "Oil Markets and Arab Unrest," noted "few things can short-circuit growth like an oil shock, both because of the fuel's ubiquity and because of the relative insensitivity of demand." In other words, oil is our economy's lifeblood, and the United States will pay whatever is necessary to keep the transfusions coming from across the world.
The ongoing events in Egypt, Tunisia and Libya have highlighted just how susceptible the oil market is to fears that supply will be disrupted. In just one trading day, the price of a barrel of oil jumped by over 4 percent because of the political upheaval in Libya. This dramatic increase in the global price of oil is particularly interesting considering that Libya accounts for no more than 2 percent of global oil production.
So who pays when oil prices increase? Well, the oil importers certainly are not wringing their hands over rising gas prices, and although transportation businesses may be cringing about the impending costs of energy, in the long run those costs will be paid by consumers. As The Economist noted, "When oil prices jump, consumers have little choice but to accept it, spending less on something else." The rising energy costs will be passed along to the average American citizen in the form of rising food and consumer good prices. Thus, the increased percentage of income being spent on fuel will prevent consumer spending from fueling GDP growth in the present and could decrease the new American savings trend, curtailing the economy's ability to secure capital for future investment.
The American government has avoided properly addressing the oil question for decades. Despite President Obama's greenest intentions, the current administration has performed no better. Obama's reaction to the BP oil spill - imposing a moratorium on deep sea drilling in U.S. waters - has only increased our economy's vulnerability to oil shocks originating in the Middle East. In fact, his administration did not resume issuing permits to allow deepwater drilling in the Gulf of Mexico until the beginning of this month. That decision certainly was motivated by the need to increase oil production following the unrest in the Middle East. Obama's delayed decision proves that even political leaders with high ideals inevitably succumb to the pressures of oil prices.
In the medium term oil is here to stay, but our public officials need to do their best to wean our nation off the slippery narcotic. From a purely economic standpoint, it is in our nation's best interest to invest in the leading alternative energy sources for the future, whether they be solar, hydrogen or - gasp - even nuclear power. In addition, our government and business leaders should not be afraid to question the popular wisdom and must be on the lookout for Trojan horses like ethanol and Al Gore's beloved Chicago Climate Exchange.
If government leaders truly want to decrease American dependence on oil they should put their political hides on the line by increasing the gas tax and imposing an additional tax on any non-hybrid car sold within the United States. That would shift demand dramatically away from vehicles that consume large quantities of fossil fuels. While I certainly would not vote for a leader who proposed such measures, I would have to give him credit for risking his political career in pursuit of what he believes is good policy.
In the meantime, what should consumers - and particularly students - do to hedge themselves against high oil prices? I would suggest investing in oil related stocks. These stocks tend to move in tandem with fuel prices. When filling up your gas tank becomes pricier, the value of your portfolio will rise to offset the additional gas expense. Even buying just a few shares in a drilling company or refinery will allow an individual to participate in the upside of this overall depressing economic trend. In the 1980s the pop culture mantra was to "Walk like an Egyptian," but the current generation should be whistling a tune more akin to "invest like a Saudi."
Ginny Robinson's column appears Wednesdays in The Cavalier Daily. She can be reached at g.robinson@cavalierdaily.com.
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