Oil's Web of Influence

During a decade when New York City and Washington, D.C. were attacked, New Orleans was destroyed by floods, trillions of dollars of homeowner equity evaporated in the housing market, the stock market lost nearly half of its value, and the nation's financial system came within a whisper of complete paralysis, a rise in oil prices over 10 years from $30 per barrel to $100 seemed tame enough by comparison to be overlooked as a primary contributor to tepid economic conditions.

Such an oversight would be a big mistake. Many national, international and state-level factors contributed to a decade of slower economic growth in NH-but empirical evidence suggests that a dramatic rise in oil prices has also played a large and increasing role.

Oil's web of influence is wide, snagging politics, energy and hospitality (as it affects vacation plans and day trips) in its throes. Even worse, oil prices are set worldwide and are maddeningly immune from intervention by state or even national policymakers who always discount the importance of any phenomenon not amenable to direct policy intervention and that won't win them votes.

High Oil Prices, Less Growth

New Hampshire may have weathered the recession better than most states, but it would have done even better were it not for high oil prices. Prices peaked in NH in the summer of 2008 when gas averaged $4.37 a gallon and heating oil $4.74. That was during the recession, just before unemployment levels shot up to 7 percent.

High oil prices act like a tax increase and reduce the disposable income available to purchase other goods and services. They also affect consumer confidence. Nine of the last 10 recessions nationwide followed oil price spikes. My analysis of the data indicates that employment growth is lower in NH between two- and three-tenths of one percent for every $10 per barrel increase in the price of oil. To put that in perspective: Despite recent declines in oil prices, the average price during 2011 is expected to be about $95/barrel (bbl.), implying that job growth will be between 2,000 and 3,000 lower this year nationwide than it would have been had oil prices remained at their 2010 average level of $80/bbl.

Gasoline sales in terms of number of gallons purchased in NH peaked in 2004 and declined by 17 percent between 2004 and 2010. Yet total dollars spent on gasoline increased by 24 percent during that time. Conservation has not been enough to temper  higher gas prices. By 2006, prior to the housing bust and great recession, oil prices averaged $66 per barrel and had already doubled over the beginning of the decade. Gasoline prices averaged $2.56 per gallon in 2006 and home heating oil averaged $2.28. Had prices remained at those then-elevated levels, Granite State households would have saved about $975 million in energy expenditures between 2007 and 2011. Making that money available for other purchases would have resulted in 10,500 to 13,500 more jobs (or fewer job losses) in NH during that time period.

The cost to state government has also been large. Higher gasoline prices narrow NH's sales-tax free advantages and reduce disposable income for discretionary trips to NH that produce large amounts of revenue. There is a strong relationship between large changes in gasoline prices, NH retail sales, meals and rooms spending, cigarette tax and other state revenues. Oil didn't cause the great recession, but it has been a major contributor to slower economic growth over the past decade.

Muted Growth Policies

Total wages and salary income in NH increased by about $1.06 billion between 2006 and 2010. Most all of those increases were eaten by the $975 million in additional energy expenditures. Higher oil and gas prices also help explain why some national policies to stimulate the economy appear less than effective. The Making Work Pay tax credit that was part of the 2009 stimulus plan provided an estimated $560 million to NH households, barely enough to offset the increased energy expenditures between 2008 and 2010. Reductions in the payroll tax in 2011 are expected to make about $600 million available to NH households, about enough to completely offset the expected increase in energy expenses (over pre-recession price levels), but not enough to provide a real economic boost.

Regardless of which political party is in power, there is simply no precedent in this country for solid economic growth during a time when the housing market and construction were weak and energy prices were high. State policymakers have little influence on housing markets-and no influence on oil prices. It is increasingly a blood sport to argue about taxes, regulations, and spending as the root of economic malaise, but an
accurate understanding of the factors contri-buting to slower economic growth in the Granite State-namely oil prices-is critical for policymakers to avoid missteps that hurt the state's economy. We're not going to run out of oil, but prices will rise again, and that means more money spent at the pump-and less on activities that grow the economy.

Brian Gottlob is principal of PolEcon Research in Dover and has worked 18 years analyzing economic, demographic, labor market, industry and public policy trends. He can be reached at bgottlob@poleconresearch.com or 603-749-4677.