Economic reality is that high prices benefit some people even when they hurt many others. Moreover, high prices motivate actions that benefit society in the long run.
It is human nature to dislike paying more for goods and services. For people with any given income, $2.25 per gallon of gasoline leaves less for other purchases than when it costs $1.25. Hamburger at $3.89 per pound takes up more of the budget than at $1.89.
But for every buyer, there is a seller. High prices disappoint consumers but are welcome to producers. Refiners, large oil companies and oil exporting countries benefit from high oil prices. So do communities in the United States where energy production is important.
There are few such places in Minnesota. But one only has to travel to neighboring North Dakota to find towns that are booming precisely because of high oil prices.
North Dakota is not Saudi Arabia. Still, important petroleum deposits are found in the western third of the state. Dickinson, a regional city of 16,000 about 280 miles west of Fargo, is the center of North Dakota’s oil patch.
North Dakota oil is not found in huge formations underlying many square miles of the state’s surface. Drilling new wells is only a paying proposition when prices are relatively high.
When oil drops to $10 per barrel, as in the mid-1990s, only two or three drilling rigs may operate in the state at any one time. When oil prices are high, as now, the rig count may rise to 20 or more.
That makes a difference for Dickinson businesses. When many rigs are operating, eating places are jammed, motels are full, and local fuel dealers put in extra hours delivering diesel to thirsty machines that run around the clock.
Oil companies are willing to pay more for drilling-right options, and property owners have more cash to spend at local businesses. Dickinson drivers hate to pay $2 a gallon for gasoline just as St. Paul residents do, but high oil prices do benefit their community.
The same is true for traditional oil-producing states and in evolving natural gas production areas such as Wyoming or the Four Corners area of Arizona, New Mexico, Colorado and Utah. High energy prices benefit these states as much as the Gulf Coast or Oklahoma.
Copper is another example. Copper is near $1.70 per pound. A year ago it was $1.20. For much of the 1990s it was below 85 cents. Most people pay less attention to copper than oil because few households purchase copper directly. Instead they buy goods containing copper.
Higher copper prices mean higher costs for new plumbing and wiring. Increases in copper prices get passed along to home buyers, remodelers and those purchasing any product containing copper. The higher prices for producers have to come from somewhere.
This is great news for Butte, Mont., Morenci, Ariz., and any other city involved in copper production or processing. Employment and spending in these mining towns increase when copper prices rise.
U.S. copper mines are not as low-cost as the newer mines in Chile, Peru or Zambia. Few can make money below 80 cents per pound. Now that the price is more than twice that level, U.S. operations are ramping up production as much as possible. There is more employment, construction, investment in machinery and transport services. These translate into more local spending.
Oil drilling and copper mining respond to price signals. When prices go up, these activities increase. In time, more drilling and mining increase supply. Prices drop at least somewhat from the spikes that prompted expansion.
Higher prices also motivate innovation. Most oil production in North Dakota would not have been feasible with 1970s technology. The development of 3-D seismic graphing and directional drilling technology makes it possible to tap small oil formations economically.
When oil is cheap, there is little incentive to invest money to develop such technology. Rising prices send scientists and engineers back to their computers to find new ways to produce the valuable commodity at lower costs. In the long run, better technology enables production of more goods and services with the same level of resource use. That benefits everyone.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.