 | Higher Oil Prices Don't Subtract Money From the Economy |
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Yesterday on Chicago radio (WLS 890 AM's Roe & Roeper Show), Congressman Adam Kinzinger was interviewed on a variety of issues, including the economy. Unfortunately, Rep. Kinzinger espoused one of the great economic fallacies in the media today without a second thought.
During a discussion about the budget, Rep. Kinzinger turned to oil and said, "Real quickly, if you talk about pulling money out of the economy, the fact that fuel has increased, a gallon of gas has increased, you know, a dollar basically over the last month or so, that has taken $140 billion dollars out of the economy and given it overseas. That's serious..."
We aren't arguing with his statement about gasoline costs – they have spiked, for sure. But, the idea that higher oil and gasoline prices are "pulling money out of the economy" is simply a fallacy. Think of the economy in terms of double-entry bookkeeping. When consumers spend on a good or service, there is an equal amount of revenue collected by the producer or service provider. So, when you spend $75 to fill your gas tank, the gas station gets $75 in revenue. The gas station pays the wholesaler, who pays the refiner, who pays the oil company. All of these entities earn a profit (hopefully) on their sales.
When consumers pay higher prices for gasoline in Illinois or North Carolina that money is revenue for producers in states like Texas, Oklahoma, and North Dakota. These places benefit from the higher energy prices and the higher revenues they receive. These producers, refiners, and drillers take those higher revenues and spend it on more exploration and R&D, or as higher wages for their workers, who in turn spend more than they otherwise would have. Either way, the money doesn't simply disappear from the economy as Rep. Kinzinger alleges. Only the Federal Reserve has the power to take money out of the economy, and clearly, given their easy money policy, the Fed isn't doing that.
Even when our energy spending ends up in the hands of overseas oil exporting countries or corporations, that money gets spent back here in the US because this is the only place in the world that dollars can be spent. As an example, according to the US Treasury (click here to view the data), oil exporting countries hold $215 billion of Treasury bonds. That's direct investment back into the US from the money we spend on oil. And if these oil exporters don't buy Treasury bonds, they would be forced to find other investments (stocks, bonds, private equity) to purchase, like when the Abu Dhabi Investment Council purchased the Chrysler Building in 2008. Or better yet, the Sheiks would buy 747's to fly to the US so that they can rent the top floor of major luxury hotels and get world class healthcare at US hospitals. The dollar system is a closed system, the money does not disappear. It can't.
This does not mean that rising gasoline prices are not a burden on many Americans. Spending more on energy, means we have less to spend on other things. But, that's not the point. The economy, as a whole, loses nothing. Rising oil prices mean that one group of people benefit, while others have an impediment to higher living standards.
Click here to listen to Rep. Adam Kinzinger's radio interview.
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