Spiking Gasoline Prices Hammer Economic Recovery

January 16, 2011

Rising gasoline prices are hammering the U.S. economic recovery.  Gasoline prices have been steadily climbing over the last few weeks, wreaking havoc with the U.S. economy.  CNN (WWW.cnnmoney.com), Fox news (www.foxnews.com) and Consumer Reports (www.consumerreports.org) all report a substantial increase in the cost of a gallon of unleaded regular for the week of January 10, 2011.  Nationwide the average price has spiraled to a whopping $3.09, up 19 cents since the first of the year, and an increase of 34 percent compared to last year.   This is the highest average gasoline price since October 2008. 

The price of oil continues to hover above the $90 level.  Oil closed at $91.54 on Friday, Jan 14, 2011.  The Wall Street Journal (www.wsj.com) reports that for every $15 increase in the price of oil there is a 1 percent decrease in U.S. GDP.

Energy analysts are somewhat baffled by this spike.  Historically, we don’t see this type of spike until later in spring when people start driving more and thinking about spring break or summer vacations.  Normally, at this time of year, consumers are driving less, paying off credit cards from holiday usage and trying to survive.  Gas supply is still strong; refineries are operating at peak levels, and there are no unusual outside factors driving the current spike.  Economists have noted the unusually warm fall weather, followed by a substantial snow storm across much of the countryside, have influenced the overall price.  Overall, consumers are driving less, some caused by rising gasoline prices, but also the large number of unemployed workers and uncertainty about the U.S. economy.  

It is way too early to develop accurate forecasts for 2011 and beyond, there is no indication that 2011 will be anything different that 2010.  Although future trends are extremely risky to predict, there are some prognosticators who have put forth a number of interesting hypotheses:

• John Hofmeister, the former president of Shell USA and the author of “Why we Hate the Oil Companies,” and founder of Citizens for Affordable Energy (www.citizensforaffordableenergy.org) predicts Americans will pay $5 per gallon of gasoline by 2012.
• Gasoline expert Fred Rozell predicts that 15 states, including Hawaii and Alaska, will see gasoline prices top $4 by Memorial Day 2011.
• The Energy Information Administration’s (www.eia.doe.gov) latest gasoline price forecast estimates that regular-grade motor gasoline’s retail prices will average $3.17 a gallon this year, 39 cents per gallon higher than last year.

 

What’s causing the spike?  Experts really don’t know.  Rising crude oil prices surely have an impact; but beyond that, the experts can only speculate.  Some economists have blamed the increase on China’s rising energy demand; while investors blame the spike on lack of confidence in the U.S. economic recovery and world financial crisis. 

What remains clear is that rising energy prices will negatively impact the U.S. economic recovery in 2011 and beyond.