I am watching (uneasily) gasoline prices climb past $1.70/gallon-and very concerned about the economy. It seems to me that high gasoline prices always are a harbinger of economic slowdown-after all, so much depends on the price ofoil. A large price spike (as to $3.00) would definately suck a huge amount of purchasing power out of the economy-and stop this fragile recovery in its tracks…but is it enough to cause a full-blown depression? (I mean like >15% unemployment, etc.?)
$1.70? Sheesh, be thankful. Here in the Bay Area we’re at about $2.15 and counting. If I had more than a two-mile commute I’d be PISSED.
In regards to the OP, I’d have to say that $3/gallon for gas would cause price increases throughout the economy, since transportation costs are included in pretty much any material good.
BTW, Ralph, they’re requesting your presence in the Madeline Albright, you’re a liar thread you started in the Pit earlier today.
Interestingly enough, normal leaded fuel seems to cost over $5.00 a gallon in the UK. Of course, we have more people per area, so the disincentive to use private transport needs to be higher. Still, I suspect that breakdown of both countries would show that most people live in cities and experience similar environments, so that arguement might be bogus.
A depression with 15 percent unemployment? I doubt it. A rise in oil prices that large would cause some problems, to be sure, but it’s not like we have a lot of industries that are teetering right on the brink of disaster right now. We could survive a supply-side shock without too many ill effects. In 1974, inflation was already at about five percent when the shock came, and that’s what sent it spiraling upward so fast. Current inflation is around two percent, so a hit from the oil department might push it up to around six percent. Painful, yes, but the economy can survive that.
How does it cost in other parts of the world?
In India, we pay about $0.80 per litre for normal unleaded. Higher octance fuels cost about $0.89 per litre. Diesel is subsidised here, so quoting its price would be pointless.
Not that he is wrong, but I should probably point out to Bromley that a UK gallon is bigger than a US gallon. 1 gal (UK) = 4.54609 dm[sup]3[/sup] but 1 gal (US) = 3.78541 dm[sup]3[/sup]. This means that 1 gal (UK) = 1.2 gal (US). Not a lot of people realise this, particularly British people when they are comparing prices. Since fuel here is about 80p per litre, that still makes 1 gal (US) cost about £3.03 and not the £3.64 that many British people would assume.
Of course we have to balance that by the >20% increase in exchange rates over the last year! That means that at current exchange rates, a US gallon of fuel costs about $5.61. So you can take that $3 and stuff it, frankly.
pan
I’m not sure what you’re getting at. In Oz and in Europe, prices have always been higher that in the US because of taxes. Also in Oz, and I assume unless you tell me different in the UK too, the price of gas over the past year has remained about the same in local currency. The oil price in USD has gone up, but the USD has gone down the toilet at exactly the same rate. Which kinda indicates that the USD is no longer the global defacto currency standard.
Anyway, aren’t you an actuary? You’re supposed to be good at math stuff. Work it out and report back.
About kr. 8 per litre here - which gives something like $5 a gallon (and yeah that pisses me off). Our economy is doing pretty well, we even got a solid surplus on the state finances.
- Rune
“It’s higher in <another country>” is not a relevant argument here. It’s not the absolute price of gas that’s in question, but the effects of a rapid increase in gas prices. (Change over months or years, not decades.)
Other countries with high gas prices don’t have the large amount of gas guzzlers that we have here in the USA, so a comparison of prices there vs. here is not relevent.
My car requires premium fuel and in the SF Bay Area, I have seen self-service prices for premium as high as $2.60 recently. Luckily, I can buy at Costco, which is generally $0.30-.40 cents cheaper than other local stations. My last fill-up of premium on March 5th was at $2.20/gal.
I have seen predictions that the price of oil is going to reach $60/baralle in the next year or so. That will send gas here over $3/gal and will pretty much spell DOOM for the Bush administration in the upcoming election. Gas prices are something that like jobs, people see every week when they fill up their tank.
As to an actual depression, while gas prices may exacerbate the possibility, there are many other economic issues that may contribute. For instance, the crash of the housing bubble, crash of the dollar on world markets, increase in interest rates, etc., etc.
You may want to read this Link
The biggest people hit will be the people in the gass guzzlers (SUV’s, sports cars, high performance anything). The people tend to have more money anyway, so it wouldn’t start a depression.
Besides, it may get people to carpool more, and/or walk/bike/mass transport more as well. American culture it to dependant on automobiles and gas. As the same time, we are horrible about using economical vehicles. Something like this might be the kick in the pants we need to quit being such greedy wastefull bastards.
Not necessarily. Here in the metro DC area many people commute upwards of 60 miles per day backand forth to work. Last year, when I had a commute of 120 miles per day I drove a 92 Honda Accord. It was pretty well maintained and fairly good on gas. But still I had to fill up the tank twice a week. At @ $20 a pop that’s @ $160/month. And these were at prices of @ $1.50-$1.60/gallon. And I for dang on sure don’t have a lot of money. If gas prices were at $3/gal it would’ve been extremely difficult for me.
This is a good idea for people who have good mass transport systems available to them. But you also have to keep in mind that fares would definitely increase and that could cause problems for people on the lower end of the economic scale.
This has it exactly right. It’s the change that kills you…not the high prices.
The American economy is currently geared to gas at $1.60-$2.00 or so. Add another dollar to that and the cost of everything goes up. And I mean EVERYTHING. Any item that needs to be shipped suddenly has a higher cost. Oil-fired power plants suddenly cost more to run and that gets passed on to the consumer, etc ad infinitum.
So suddenly we’re looking at an economy without as much money available because more of it is going to fuel and higher prices. Consumer and business spending declines (or rather the same money is buying fewer items), inventories increase (at least until production can be curtailed) as demand shrinks, lower demand leads to lower job production (or more layoffs).
It wouldn’t be disasterous…but it would definitely cause a recession if the jump happened rapidly. If it occured gradually the economy would have time to adapt.
Even in the disaster scenario given enough time market forces would again stabilize with assumed expenses now higher (and incentive for alternative fuel sources now higher).
So some digging for numbers from the US Senate pdf chart
In 2000 the US consumed 20 million barrels a day, about 75% of that was for transportation (13 million barrels). At $1.50 that works out to the economy paying $1.26 billion a day in oil consumption. Over the course of 1 year that’s about $460 billion dollars or about 4.5% of the US GDP. By doubling the price of oil I would expect that number to jump to 9%. That means a 4.5% drop in GDP from other sectors of the economy.
Nasty if its sudden, less so if its progressively built into the cost of doing business.
To respond to Desmo and scr4: you are, of course, correct. It’s always movements that kill you, not absolute prices (they just murder you in the long run…)
So to make amends, I’ll toss in the classic example: the 1970s oil shock. A rapid movement in the price of oil in the UK did indeed send the country into serious recession. Maybe not quite depression, but it was a significant factor in the longest and deepest recessions this country ever saw. (Insert standard disclaimers about other effects making it difficult to isolate the results of one effect only).
Oil price has a key role in everything. You hike that up and the costs of supply go crazy. No need to detail THAT effect…
So we come to two questions:
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When you say $3 per US gallon for petrol, are you only talking about petrol or do you anticipate oil in general going up by similar amounts. The former would have a far more dilute effect.
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And, of course, is a $2.20 -> $3 increase (36%) suffficient enough a shock? I would guess no, though it would seriously dent the economy.
Incidentally, this is all a good reason to tax fuel heavily. In the UK, about 65p of the 80p per litre is tax. This means that the underlying cost per barrel can double whilst the cost to the motorist goes up just 31%. Hopefully the resulting shock is then massively reduced, particularly if the government accommodate it with a reduction in tax. Gearing – gotta love it.
pan
Damn! Stupid of me to apply a gasoline price to an oil price. You may now chuck all my numbers into the bin.
Since I am an oil market analyst/industry economist, I figured I’d pop into this thread.
I think it’s difficult to make sweeping statements like “$3 gasoline will cause a depression”, because the economy does not work in a vacuum. So, $3 gasoline and what other factors?
Obviously, increasing gasoline prices will have an affect on behavior and disposable income, which will be translated throughout the economy in terms of lower consumption of other goods via our old Econ 101 budget constraint (you only have so much $, and spending more on gasoline leaves you with less to spend on other things).
Much of this depends on price elasticity of demand for each good, including gasoline. Basically, elasticity tells you how much of a change in demand of a good will occur for each $1 change in price of that good. In the short run, we’ve found gasoline to be fairly inelastic, meaning that price increases don’t have a large effect on consumption. This is because if you live x miles from work and need y gallons of gasoline to get there, you don’t have much choice about filling up if you wake up tomorrow and prices have climbed by 10 cents per gallon. You’ve gotta get to work or else be fired.
So in the short run, you may try to cut down on non-essential trips, but core consumption remains pretty stable in the face of increasing prices. Case in point, gasoline demand remains quite high right now despite the fact that we are facing the highest retail prices for this time of year on record.
In the long run, gasoline is more elastic, as people may decide to drive more fuel efficient cars, take public transportation, move closer to work, etc. So sustained high prices may shift demand down.
But back to my point about the economy as a whole, since gasoline demand is inelastic in the short run, consumption of other goods with more elastic demands will have to fall. So while it certainly will have a depressive effect on other industries, it’s impossible to say what the total effect will be without looking at the whole macroeconomic picture.
People still use leaded fuel? Don’t you folks have scientists over there? 
[QUOTE=ralph124c]
Would $3.00/gallon Gasoline Cause a Depression in the USA?
[QUOTE]
Only among drivers of 12mpg SUVs. And I could stand to see them a little sadder about their purchasing decisions. 
I don’t know if it wouild cause a depression, but it would certainly have an impact. FWIW:
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I commute roughly 130 miles a week, including side trips to the gym most days, and weekend jaunts.
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Last I recall, I’m paying about $2.45/gal for premium
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My car, an old Infiniti, gets about 20 miles/gallon.
So, I’m using about 7 gallons a week which, today, costs about $17.15. Rasing the cost per gallon to $3 means only a few dollars more. Won’t like it, but it won’t break me.