Low oil prices don't always aid economy. (Commentary).

Everywhere you turn, there's another article touting the boost lower oil prices are giving to the U.S. economy.

What about Japan? Doesn't that country get the benefit of what is widely viewed as a "tax cut" for consumers? Here's a country that imports all of its energy, not to mention most of its raw materials, yet plunging commodity prices don't appear to be acting as much of a cure-all on Japan's moribund economy.

"In the Great Depression, energy prices -- all prices, in fact -- were tumbling," says Paul Kasriel, director of economic research at the Northern Trust Corp. in Chicago. "That should have been a great stimulus. By all rights, things should have been booming in the Great Depression."

With the exception of Kasriel and a handful of others, no one considers why the price of oil is falling and what the implications of it are. (An economist friend of mine, who shall remain nameless, says it's the pons asinorum -- literally "bridge of asses" -- of economics.)

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The price of a commodity can fall because of increased supply or reduced demand. Is OPEC pumping more oil? Hardly. While the countries that make up the Organization of Petroleum Exporting Countries cheat on their respective quotas, they have cut official production by 3.5 million barrels a day this year.

"The price of oil is falling because of a shift back in demand," Kasriel says. "Why is it good if this one price falls for that reason? Why isn't it good if all prices go down?"

When all prices go down, it's called deflation. Anyone reading the papers these days knows that deflation is as big a story as oil. My exasperation with the way the oil story is being told -- as a one-way street, with only winners and no losers -- is not an argument against a pick-up in the economy in the U.S. It's more a matter of being right for the wrong reason.

A history lesson is in order. Back in 1986, when OPEC was engaged in another price war, crude oil prices plunged in the first quarter of the year, giving rise to the same nonsense about a tax cut for the American consumer.

Specifically, crude oil prices fell from $32 in November 1985 to $10 in April 1986, a 69 percent decline. Real gross domestic product rose 3.7 percent in the first quarter. With oil plummeting and the Federal Reserve aggressively easing monetary policy -- the Fed lowered the discount rate by 200 basis points between March and August -- there were great expectations of a boom in the April to June quarter.

Alas, second-quarter real GDP growth was less than half that of the first-quarter: 1.7 percent. The post mortems on the results claimed that, ah, yes, lower oil prices wreaked havoc with the oil patch -- those areas of the country, such as Texas, that rely on oil production and revenue as a source of income.

Anyone who thinks falling oil prices are unequivocal good news for an economy should do a refresher course on 1986. Although consumption spending on energy goods accelerated from a 7.6 percent increase in the first quarter of 1986 to an 8.5 percent increase in the second quarter, overall consumer spending decelerated to 3.4 percent from 3.7 percent, Kasriel says.

What about investment?

Curious as to what could have been the source of the economy's tepid growth, Kasriel mined the data and found the answer at the well-head. The hit to GDP came from falling investment: specifically investment in petroleum and natural gas structures, which fell 23.3 percent in the first quarter and 85.4 percent in the second. (It makes the 19.5 percent decline in investment in information technology in the third quarter of 2001 look like child's play.)

Despite the oil "tax cut" and Fed ease, the economy did not fare that well. "Maybe the oil price decline, which slowed domestic business activity, affected GDP more than (increased energy) consumption helped," Kasriel says.

The repercussions from falling oil prices in 1986 should make people be somewhat circumspect when they declare falling oil prices to be an unconditional positive for the economy.

Then again, why ruin a good story with the facts?

Caroline Baum is a columnist with Bloomberg News.