Consumers Facing Rising Gas Prices – Again

Bad news for the already fragile U.S. consumer – gas prices are on the march again. They mostly drifted sideways throughout the summer during the initial stages of the economic recovery, but they’ve climbed to $2.68/gallon over the past few weeks (using the AAA Daily National Average Gasoline Price from Bloomberg). Last year’s rollercoaster ride is probably still fresh in most drivers’ minds, when crude oil soared to $145/barrel and pump prices rose to over $4/gallon during the summer, only to collapse to $1.62/gallon by December as economic activity ground to a halt.

It’ll be worrisome if the recent rise continues, since consumers are already struggling under the weight of several well-documented issues, including rising unemployment, falling home prices, restricted access to credit, and falling wages. Now, they again face the prospect of higher gas prices, as businesses bring more and more idle resources back online, causing demand for commodity inputs to increase. U.S. consumers have certainly proven to be a resilient bunch for a long time, but they are being challenged mightily at present. It will not be a welcome development to see gas prices surge appreciably higher, since they effectively act like a tax by siphoning off additional dollars that consumers are already being more discerning about as they tighten their belts in the current environment. A surge in energy and other commodity prices similar to last year’s is on our list of risks to watch for that could short-circuit the economic recovery.

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.