So, what’s up? Oil prices, for one. Food prices, too. As Americans, we have gotten used to cheap fuel, both for our cars and our bodies. Recently, there have been calls to repeal federal subsidies to the oil industry, in hopes that it will encourage development of alternative sources of energy and lead to long-term relief from oil prices. Some believe that such an action would have the effect of raising gas prices in the short term, and they’re probably right. I would think that the oil companies have to recoup losses somehow, and it usually winds up being the consumer who pays. As someone wedged smack in the middle of the middle class, I know I’m feeling the pain of higher gas and higher food costs, and I can’t say that I like it very much. But if I step back and observe the situation in a more impartial light, I have to question the use of subsidies in both industries.
I’m no econ genius, to say the least. I remember the graphs showing supply and demand curves, and some mysterious shaded portion ominously called the “deadweight loss.” And there was something in there about subsidies being a negative, as they prevented markets from functioning at equilibrium levels because they artificially distort market prices. In the US, growers of certain crops receive government subsidies, which have the effect of encouraging farmers to grow a few primary crops in large quantities. These crops (mostly corn, soybeans, and wheat) are the building blocks of much of our processed, inexpensive foods, which are taking the place of more nutritionally dense foods in our diet. Large quantities of inexpensive food sounds like a good problem to have, and I’m sure the original intent of these subsidies was benevolent. However, the alarming growth rate of obesity and related diseases in our country may be due in part to an increase in readily available and affordable processed foods derived from our primary crops. In many cases, food’s affordability and nutritional value have an inverse relationship, so it would seem that we are, in fact, doing ourselves a disservice by making it easy to load up on nutritionally deficient food.
Subsidies to the oil industry are another head-scratcher. We know that fossil fuels are a natural resource in decline – we can’t wait around for organic matter to decompose over millions of years and create more hydrocarbons. Why are we always so surprised when the price of oil goes up? The Europeans laugh at our outrage over $4/gallon gas prices, which is nothing compared to what they’ve been paying for ages. Maybe we do need to take away the subsidies in order to feel the pain and provide the incentive to take the next steps and make the right choices. I’m not a big fan of paying more for gas and groceries, believe me, but I think it’s crucial to look at the big picture and take the long-term view.
Sarah DerGarabedian, CFA
Director of Research