Why Gasoline Prices Aren’t An Economic Threat

By Matthew Weinschenk (Wall Street Daily | Original Link)

Gasoline prices are the latest boogeyman to have us all shaking in our economic boots.

We’ve seen the doom-and-gloom story picked up by every news outlet from CNBC to The Wall Street Journal. It’s even been tweeted by John Boehner (though, I’m guessing for reasons other than economic analysis).

And while it may be full of sound and fury, there’s little sense to all the coverage. As I’ll explain, the economy is safe from any hikes in gas prices.

A sober analysis shows that gas prices still have a long way to run before they threaten economic growth. In fact, it’s unlikely they’ll ever move high enough to do any real damage.

Sure, the argument that high oil and gas prices stifle the economy makes superficial sense. Prices go up, wallets get tighter and economic discomfort results. We’ve all seen it happen before.

But here’s what’s not being taken into account in this “oh no, here we go again” speculation. It’s precisely because we’ve seen these high prices before – and recently, too – that this time around the economy’s not going to stall out on higher gas prices.

Been There, Done That

You see, it simply doesn’t matter what gas prices are at any given moment in time. What really matters is how they got to where they are and where they’ve been before.

Look at it this way, 2008 was a kind of “school of hard knocks” for gas consumers. We learned a great deal about the economics of oil, and the volatility taught us that prices could move in ways that we wouldn’t have expected.

So, weathered and made wiser, we’ve changed our behaviors and expectations, while adjusting our budgets accordingly. We’re far better now than we once were at making sure we can absorb fluctuations at the pump.

(Think about your own reactions for a second. Are you nearly as surprised at the recent rise in gas prices as you were when it peaked in 2008? Probably not.)

One result of our shifting behaviors is that we’re simply less dependent on gas. The percentage of trucks among total auto sales has dropped from over 60% in 2005 to 50% now. That means a million less gas-guzzling trucks are on the road each month.

Moreover, individual consumers have reduced their energy spending as a whole. The percentage of a consumer’s budget spent on energy consumption is down, on average, from 5.22% in 2008 to just 4%.

Spending less on gas and energy means that the few upticks we’ve experienced in gas prices won’t have much of an effect on our wallets, or even the economy at large.

But there’s another reason we shouldn’t be worried…

Easy Does It

Our reaction to shifts in gas prices depends on how those shifts occur. Consumers react well to slow, sustained rises in prices. But any sudden jump squeezes budgets and throws a wrench in the economic system.

For instance, the current move in prices has been relatively graceful, lifting gasoline 14% over a period of one month. The 2008 surge was much bigger, rising 42% in four months.

A similar move now would put prices at $5 per gallon by the end of April, which could indeed be a legitimate shock to the economy. But that’s never going to happen, because the setup is all wrong.

It may be strange to consider this good news, but we should be thankful that these high gas prices are almost entirely based on tensions in the Middle East. It means that the fundamentals, like supply and demand, are still healthy. And that the economy is ready and waiting for hostilities with Iran to cool. In which case we should see oil prices drop quickly.

Until then, take comfort in knowing that while this current surge in gas prices may drain some extra money from your wallet, that’s the very worst of it, as it’s unlikely to affect the amount of money going into your wallet by causing another recession.

Ahead of the tape,

Matthew Weinschenk

— Wall Street Daily