Gasoline Price and Its Economic Impact

Gasoline prices in recent times have been very volatile which is evident from an examination of the price data for the last few years. The fact that gas cost $1 per gallon about a decade ago and doubled to $2 in six years and in another four years it again doubled to $4 per gallon is clear indication of the serious issue of rising gas prices. This steep increase in gas prices has primarily resulted due to the constant increase in oil prices in the world market over the past few months as a consequence of the forces of demand and supply operating in the true sense. The oil supply has not been increasing at the same rate as that of its demand throughout the world mainly due to the increased demand emanating from fast developing countries such as India and China and other developing countries which are all on the fast track to growth and development. The increased demand for oil as also the increased propensity of investors to risk investing in this commodity due to a weak dollar are further driving prices at a fast pace, the like of which has never been experienced in the recent past. The pricing of oil is very volatile and delicate in view of its linkage with that of gasoline; it is observed that for every one-dollar increase in the price of a barrel of oil, the price of gasoline goes up by 2.5 cents per gallon of gas. The US is amongst the countries that have been worst hit by the rising oil prices, which is evident from the fact that although it accounts for les than 5% of the world population, it uses approximately 25% of the world oil production. Other countries such as India and China are also increasing their respective oil consumption patterns in view of the rapid development as more and more people start buying cars and other vehicles.

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The price component of gasoline does not comprise the cost of oil alone since there are other costs associated with it by the time it reaches the end user. The retail price of gasoline for the consumer also includes state taxes, cost of refining oil into gasoline, cost of transportation as also the profit element of the dealers. But the main component of gasoline price is oil, which is more than half the cost as incurred by the end user. The impact of increase in gasoline prices effects several activities thus adding a corresponding cost factor to almost every product and service. It has not only adversely impacted the US economy but there have been worldwide ramifications due to its effect on transportation and tourism, and is slowly creeping into the cost factor of every economic activity in the world. Present economic trends clearly indicate that the price of oil is unlikely to decrease in the coming future thus making it imperative for gasoline prices to increase also. On top of the present crisis situation is the unwillingness of the Organization of Petroleum Exporting Countries (OPEC), which accounts for over 33% of the world oil production, to take concrete steps in reducing oil prices.

In view of the large-scale dependence on gasoline for several economic and personal activities it is not immediately possible for gas consumption to be impacted to a great extent in the short term. Instead, consumers will immediately start to spend less on other goods and services such as entertainment, vacations and electronic goods and on eating out. In a country like the USA, it is very difficult to reduce the consumption of gasoline immediately due to dependence on it for several activities in the life of every citizen. One can cancel his vacation plans and think of going for a more fuel efficient car, but most citizens will never agree to sell of their cars to do without commuting. The super strength of the economy and its prosperity during the 1990s had enabled people to buy luxury cars, which they now find difficult to afford in view of the increased fuel costs. Since Americans are not prone to traveling by public transport or to pooling cars as a result of rising gas prices, it is unlikely that gasoline consumption will decline much in the short run. In this viewpoint the effects of the increase in gasoline prices will be felt in other sectors of the economy. It is estimated that for one cent of increase in gasoline price there will be a one billion dollar decrease in spending on other goods and services. This has a further multiplier effect over time and reduces consumer spending a great deal. Since most of the increased cost factor goes outside of the US in view of its supply coming from outside countries, there s a net outflow of resources from the country thereby depleting the foreign exchange reserves and thus rendering the other imports to be more costly. Hence it is clear that increase in gasoline prices have very far-reaching adverse consequences on the economy as a whole. More and more Americans are now feeling the pinch of the repeated gasoline price hikes and have come to realize that they now have lesser in economic terms as compared to a year ago. Consumers have now started to pull back on spending and judging from the level of confidence amongst the people, it is a near panic situation in view of the constant declining of real income at their disposal. Many analysts believe that this may just be the beginning of a prolonged recession since the price of gasoline is expected to go up further.

The upward swing in gasoline prices has come to effect American households irrespective of whether they take public transport, walk or drive and in an economy of the status of US, there is immense interdependence of people in all walks of economic activity consequent to which virtually everyone is effected by the price of gasoline. Researchers at the Heritage Foundation have found that the rise in gasoline price from $3 to $5 per gallon would affect the US economy very adversely in that employment would decline by 586,000 jobs, disposable personal income would decline by $532 billion, personal consumption expenditure would decline by $400 billion and personal savings would be spent to cover the cost of living. Indeed a very gloomy picture and drastic remedial measures will have to be taken in combating the severe economic challenges emanating from such circumstances. In effect there will be increased borrowings resulting in lesser savings and higher payments by way of interests, further adding on to the multiplier effect of reduced spending and savings. Consequently these results in a feedback effect, which implies reduced disposable incomes, lower employment levels and lesser levels of demand for goods and services.

However this is all in essence a short-term revelation of the possibilities. The US economy is strong and can respond positively to economic challenges. A noteworthy development has been the efforts being made by business entrepreneurs in finding new reserves of oil and in increasing capacity for oil refining so as to reduce cost of refining. High cost of oil has also prompted businesses to look for other sources of energy to reduce dependence on oil. The government has lot of resources and if given the will on its part, it can implement measures that will result in the production of more oil within the country. Since a major component of the gasoline price comprises of taxes and levies, a good remedy would be to reduce them for the moment until the economy picks up momentum again. Additionally the government can encourage and patronize innovations for the supply of energy by giving incentives and subsidies for the development of alternative sources of energy. These steps will go a long way in reducing the hardships of the people that have arisen due to the repeated hikes in gasoline prices.

References

  1. Effects of Gasoline Prices on Driving Behavior and Vehicle Markets, 2008.
  2. Karen Campbell How Rising Gas Prices Hurt American Households, 2008, Backgrounder #2162
  3. Lars Perner, Gasoline Prices, Consumers and the Economy, Deparment of Marketing, Marshall School of Business, University of Southern California, Los Angeles
  4. Ron Scherer, The Rising Impact of High Oil Prices, 2008, The Christian Science Monitor
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