Can America adjust to higher gas prices?

at 05:38 PM ET, 02/14/2012

Normally, gas prices don’t spike until the summer, when driving picks up. Not this year. Gas prices are already surging to $3.50 per gallon nationally, in part because a number of refineries in the Northeast, Texas and Louisiana shut down early for maintenance (they usually do this each year around March to switch from winter to summer fuel blends). Many analysts are predicting $4-per-gallon gas or higher by May. Is this survivable?

Aargh. (Rick Bowmer/AP)
On the surface, the gas spike isn’t good news for the broader U.S. economy — or, for that matter, President Obama’s reelection chances. Since gasoline demand tends to be inelastic and it’s hard for people to cut back, higher gas prices bite into Americans’ wallets, leaving them with less money to spend on other things, which in turn hurts the economy. In 2011, gas prices surged, and Americans reduced consumption by 1.8 percent. But that wasn’t enough to offset the price increase: Overall gas expenditures still rose 25 percent over the past year, or $102 billion. That essentially wiped out all of the benefits from Obama’s middle-class tax cut.

For a more sanguine take, however, see Ryan Avent, who has a great graph showing that higher gas prices are essentially becoming the new normal. The portion of days each year on which Americans face gas prices over $3 per gallon has risen steadily since 2007. Back in 2009, for instance, gas cost more than $3 per gallon about 40 percent of the days. In 2011, it was 40 percent. This year, it’s already been 50 percent of the time.

“The longer the market is confronted by expensive petrol,” Avent writes, “the more willing consumers will be to alter their consumption patterns, and the better the market will become at supplying substitutes. A greater share of vehicles on the road should be highly fuel-efficient, for example, allowing households to handle a rise in petrol costs without having to reduce expenditure on other items as much as they might have previously. The impact of an oil shock, in other words, should be reduced.”

There’s some confirmation for Avent’s theory in this data set from the university of Michigan’s Michael Sivak. The average fuel economy of new vehicles sold has been rising steadily over the years — it’s now at an all-time high of 23.0 miles per gallon, up 0.8 mpg from December. Americans really do seem to be changing their behavior in response to higher gas prices. Still, that adjustment can be sluggish, which means, in the short term, the U.S. could still take a painful economic hit.

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