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Glass Half Full

The U.S. is experiencing an energy boom. More gas and oil are being recovered, making it possible that the U.S. will become the world’s largest energy producer.

Is that a good thing for the U.S. economy? Well, of course it is, as the value of all that additional production goes to increasing GDP.

But the glass is always half-empty for those who think carefully about economics.

The US manufacturing sector, for example, may improve its competitiveness because of the new energy environment, but this sector accounts for less than a sixth of overall US employment. In addition, a declining energy trade deficit could put upward pressure on the US dollar, which could erode the competitiveness of other manufacturing industries where energy input costs are less important (such as automobiles, electronics, and aviation).

I can think of a couple of other, perhaps counter-intuitive effects of the energy boom on the U.S. economy:

1) More production means somewhat lower prices for all energy produced. There was already some energy production in the U.S. Plentiful gas, for example, is going to lower the relative value of other domestically produced energy.

2) Factors of production consumed by the booming energy industry (think of all the labor, for example, that will go to producing the additional energy instead of to retail or manufacturing) will become more expensive for everything else, making the production of everything else somewhat less efficient.

It’s certainly better to have more energy than less, but “thinking like an economist” means imagining trade-offs like this.

Categories: Microeconomics
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