OIL CHANGE.(The Talk of the Town)(petroleum and the US)

It was sometime last spring that the dreaded words "oil shock" first began to appear regularly in commentary on the United States economy. As the price of oil rose past forty dollars a barrel, many economists and Wall Street analysts predicted that higher petroleum prices would slow the economy and perhaps even throw it into recession. They recalled the reverberations of previous oil shocks (in 1973, following the Arab oil embargo; in 1979 and 1980, after the Iranian revolution and the Iran-Iraq war; and in 1990, after Iraq's invasion of Kuwait) and suggested that we'd soon be feeling them again. Since then, the price of oil has gone well above fifty dollars a barrel, and the oil-price anxiety is as acute as ever. Last week's news that inflation had jumped in March had people talking about stagflation and Gerald Ford. Before we know it, it will be 1974 all over again.

Or not. It may be hard to be blase when you're paying $2.50 a gallon at the pump, or if you're the chairman of a major airline, but there is surprisingly little evidence that high oil prices have anywhere close to the effect on our economy that we seem to believe they do. They matter, of course, but, of all the reasons to be concerned about America's economic standing, oil, believe it or not, belongs pretty far down on the list.

Why such a lowly rank for the economy's so-called lifeblood? Haven't most postwar recessions been accompanied by rising oil prices? Indeed they have. But correlation is not causation, and all oil spikes are not created equal. The fact that the geopolitical oil crises of the seventies hurt the economy doesn't say much about what high prices will do to us now, in the absence of a crisis.

When you look closely, it is hard to know what effect, exactly, oil prices have on the economy. For instance, higher oil prices are often assumed to be inflationary--that is, they raise prices. But Mark Hooker, a former economist at the Federal Reserve, has shown that since 1980 higher oil prices have had essentially no effect on over-all inflation. Higher oil prices are also said to create uncertainty, which causes consumers and businesses to hold off on major purchases and investments, thereby slowing down the economy. But there's little evidence of this. Robert Barsky and Lutz Kilian, economists at the University of Michigan, have found that in the past three decades higher oil prices have had no consistent effect on whether or not consumers kept buying cars or expensive household items like washing machines. (The oil spike of 1979 led to less car buying. The oil spike of 1980 led to more. Or maybe it all had to do with Lee Iacocca.) Oil shocks have also had no predictable impact on corporations' decisions about whether to invest in equipment or new plants.

Higher prices do function as a kind of tax increase that raises the cost of doing business (with the proceeds effectively going to foreign exporters). ...