Rabu, 23 Mei 2012

How natural gas stimulates the economy

Mark Perry has a post today which makes a very important point: thanks to new fracking technology, natural gas has become abundant and very cheap; this in turn has created savings of $350 billion for end-use customers over the past three years, many thousands of new jobs, and it promises to revolutionize manufacturing in this country in coming years. In short, one new idea (how to get natural gas out of shale) has allowed the U.S. economy to produce much more energy with a given amount of resources, and abundant and cheap energy has allowed consumers and companies all over the country to devote more of their scarce resources to other purposes. This is how jobs are created, not by increased government spending or artificially stimulating demand, but by producing more with less effort. Growth comes from increased production, increased productivity, and increased investment. As F. Say famously said, supply creates its own demand. I can think of no better way to illustrate why the supply-side view of how the economy works is better than the Keynesian demand-side view.

Here's an updated chart of natural gas prices. Prices are up this month, but are no higher than they were 15 years ago, and only slightly higher than they were 20 years ago. Oil prices, of course, are 4.5 times higher today than they were 20 years ago.

Relative to oil, natural gas prices have literally collapsed. Relative to oil, natural gas prices have fallen by roughly 80% compared to the late 1990s. We have only just begun to see the impact of this incredible development on the U.S. economy's ability to grow.

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