Why Soaring Gas Prices, Food Prices and Energy Costs Have a Bright Side

Why Soaring Gas Prices, Food Prices and Energy Costs Have a Bright Side

High Prices at the pump must be benefitting someone -- although everyone from the gas station owner to the oil refinery to the oil field owner is saying it's not them. Let's say, for sake of argument, that you're neither the kind of person who can take much joy in abstract possibility of reduced oil consumption and the subsequent environmental boon, or the mystery beneficiary of the increased cash flow at the pump. What's the good news for you in the higher gas prices -- or any sort of price increase?

The answer lies in an economic term called opportunity cost: this is what you give up by choosing one option to the exclusion of all others. If you choose to go to a free concert in the park, you're gaining the benefit of music and atmosphere, but it's costing you the chance to do your second-choice activity of, say, staying home and watching a DVD. Rising prices can actually lower opportunity costs if you make the right choices. In this situation, the right choice is to eschew the product with the rising price.

Let's say a meal at your favorite restaurant costs $16. When gas was $2.00 a gallon, the opportunity cost of eating out was eight gallons of gas (this is making several assumptions, not least of which is that you make some discretionary gas purchases). When gas goes up to $4.00 a gallon, the opportunity cost of the meal is only four gallons of gas. Even though the meal costs the same and your pay hasn't gone up, the meal really is cheaper in terms of opportunity cost.

Another way to phrase this is in terms of the reward for frugality. The frugal driver in the 90's who saved one gallon of gas by combining trips, carpooling, or coasting home behind a tractor trailer was rewarded with the price of that gallon, or about a dollar. Today, he gets four bucks for the same action. Other commodity increases can literally put money in your pocket: if you're selling your aluminium cans or used cooking oil, then you're hoping that the price keeps climbing (unless the price you're paying is growing at the same rate or faster.)

Increased costs reward thrift, innovation and entrepreneurial spirit. Under the right circumstances, they can allow the cream to rise to the proverbial top, as the real earnings of the virtuous climb while those of the spend thrift plummet.

And if a few polar bears are saved along the way, so much the better.