Here We (Don’t) Go Again: Higher Gas Prices?

The title represents a double entendre: if gas (NYSE:UGA) prices rise again in the first half of 2102, will drivers simply pull back and drive only when necessary, and, are much higher prices an erroneous prediction? More importantly, would higher prices seriously impair the fledgling recovery?

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AAA statistics on Monday showed that the average price in the U.S. for a gallon of regular unleaded ($3.39) is some 30 cents higher than on the same day in 2011. This statistic, facing threatened attempts by Iran to close of the Strait of Hormuz, has some forecasters noting the strong upsurge of crude oil (NYSEARCA:USO) prices recently, plus increased demand due to the ongoing recovery, and concluding that gas prices could hit $5.00 in some areas by Memorial Day. One only has to remember how quickly the crisis in Libya produced price spikes last year, to realize how much more serious the new situation and its ramifications could be. Whether or not the worst will happen is unknowable now without a working crystal ball, but it is possible to make some observations on the likely short and long term effects to the economy.

Over the years, consumers get used to …

paying more for most goods and services if the process is slow. Even if prices go ahead of inflation, which gasoline prices have (in real dollars, they have doubled since the late 1960s), buyers grumble but if the commodity is a necessity without practical substitutes, they cough up the money anyway and cut back if they can.

A more serious threat to the economy would be if much higher gasoline prices became embedded in the general price level. In that case, prices of just about everything that must be transported go up in a way that buyers do not get used to in the short term. People feel less well off, and they trim their spending plans accordingly. This was the case following the shutoff of oil to the U.S. in 1973.

Recent gas price hikes have been reflected in moderate commodity upticks, but a crisis over the Strait of Hormuz could break that pattern in a memorable way, seriously sidetracking the recovery if prolonged. Further, the effects of serious supply shocks usually far outlast the actual crises, but again, no one knows – yet – if Hormuz will be The Big One.

Long term resolutions, however, are usually far more encouraging. Canadian and European drivers have faced far higher gasoline prices than their American counterparts for many years, and have adjusted to them without crashing their economies. Some other areas in the world enjoy low fuel prices such that only middle aged and elderly Americans can remember, but their economies are not envied. The devil here is in the short run: economic problems develop when prices go up suddenly and stay up, and a crisis over Hormuz could cause just that.

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To contact the reporter on this story: Mark Lawson at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com