Rising gas prices could be a drag on economic recovery

SOURCE: AAA | The Washington Post - January 8, 2010
By Frank Ahrens and Mike Musgrove
Washington Post Staff Writer
Friday, January 8, 2010

Just what Americans need as they try to dig out from the Great Recession: gas prices headed back toward $3 per gallon.

The average price of a gallon of regular gasoline hit $2.70 on Thursday, according to the auto club AAA. That's up 67 percent from this time last year, and it's the highest price since October 2008 -- a fact not lost on drivers.

Sayed Bilal, a cabdriver in Rockville, estimated that he's spending $200 more a month on gas than he's used to.

"It's affecting everyone's budget," he said, "especially after the holidays. In my business, I depend on people's pocket money. If they don't have any . . . ." He trailed off with a shrug.

Why are prices rising even as demand for gasoline is falling? Current demand is well below levels seen in recent years. Oil refiners are actually trimming production.

The crudest explanation is that the price of gas is following the price of oil upward. Oil, like all commodities, has been rising, pushed higher by increased demand and a weak U.S. dollar.

The global economy has been improving for six months, and more activity means more demand for oil, driving up prices. At the same time, the value of the dollar has fallen relative to other currencies. As the dollar weakens, it becomes less attractive to hold, so investors are increasingly dumping the currency and moving into oil, gold and stocks. That, in turn, has helped fuel a strong recovery in commodity prices and the recent stock market surges.

Even though gas is still well off its high of more than $4 per gallon, hit in mid-July 2008, commodities traders have been watching the price of crude oil rise since almost this time last year.

Gas already sells for more than $3 per gallon in Alaska, California and Hawaii. In the Washington region, the District has the highest average price, at $2.79 per gallon, followed by Maryland ($2.68) and Virginia ($2.60), AAA said.

More than a minor annoyance encountered every time you pull up to a pump, rising gasoline prices have a real impact on the U.S. economy, especially as it's struggling to recover after a nearly two-year recession.

Every 10-cent increase in gas prices equates to an additional $14 billion per year out of consumers' pockets, Peter Boockvar, an equity strategist at Miller Tabak, wrote in a research note on Thursday. Americans already spend $1 billion per day on gas.

Rising gas prices reduce other consumer spending and can affect big-ticket purchases when prices hit certain points. For instance, when gas broke through $3 per gallon in February 2008, Ford forecasters predicted that consumers would start buying smaller, fuel-sipping cars when gas hit $3.50 per gallon. As the monthly sales reports came out through 2008 and 2009, that proved true. Truck sales sagged and buyers moved toward compacts.

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