Friday, May 15, 2009

Losing Our Natural Stimulus

Gasoline prices are on the rise so far this year, which is a concern since jobless claims have been above 600,000 for 3 ½ straight months. This is not a good development for the already hurting US consumer. Below is a chart of the AAA retail gasoline price for the past year. As you can see the price of gas remained resilient throughout the first half of 2008 but did eventually succumb to the global recession. On December 31st, the price bottomed at $1.61 per gallon at the national level after falling from a high of $4.11. This provided significant stimulus to the American people as we consume roughly 140 billion gallons of gasoline per year (using Energy Information Administration 2008 statistics). This positive effect has reversed recently as prices have steadily risen since the beginning of the year and now stand at roughly $2.29 per gallon. Using a constant demand level this price rise reflects an increase consumer cost of $93 billion, which is not what the economy needs right now as it’s attempting to stabilize.

This increase will put enormous pressure back on the consumer and prices will continue to rise until demand falls or supply rises. The refiners have efficiently shut down production to support this price increase but I would love to see more supply come back on line to support demand at a slightly lower price and return some natural stimulus to consumers.