Gas Is Headed for $3. What That Means for the U.S. Economy

Average U.S. retail gasoline prices are climbing toward $3 a gallon, the most expensive in more than three years. The national average was around $2.87 a gallon Monday. In states such as California and Washington, prices have already breached the $3 level after rising 24% and 17%, respectively, from a year ago.

Economic growth has boosted demand for oil. If that growth continues, most consumers should be able to afford to pay more to fill up their tanks. But conflicts in oil-producing regions could mean even higher gas prices, posing a threat to U.S. growth as the cost of fuel and gasoline weighs on drivers, airlines, delivery companies and other big consumers.

“Prices at the pump are quite high especially as we enter the driving season,” said Gregory Daco, chief U.S. economist at Oxford Economics. “That’s going to be one of the channels where you see a hit to people’s disposable income and spending.”

Rising fuel costs can also feed inflation and pressure interest rates. Even though the Federal Reserve typically looks past volatile energy prices in the short term, higher energy costs help shape consumer confidence. And with the central bank poised to be more active this year, rising energy costs pose an additional risk to the economy.

Morgan Stanley estimates that if gas averages $2.96 this year, it would take an annualized $38 billion from spending elsewhere, an upward revision from the bank’s $20 billion estimate in January. That would wipe out about a third of the additional take-home pay coming from tax cuts this year, the analysts said.

When oil prices collapsed in 2014, gasoline prices followed. People took advantage, driving more than ever and buying larger, less fuel-efficient cars. At one point in 2016, prices tumbled toward $1 in parts of the country.

That era may be coming to an end.

As gasoline rose above $2.50 in November, Adam Mincey started to worry. His commute in North Carolina is about 60 miles round trip, and his old Chevrolet truck got about 8 miles to the gallon. Recently, he traded the truck in for a vehicle with better mileage.

“I make decent money—I’m a scientist. But it’s cutting into our disposal income,” he said.

The steadily rising fuel prices brought back bad memories: “There were times I couldn’t fill up my tank in 2008 and 2009. I don’t want that to happen again.”

Some analysts are predicting another jolt to the market as President Donald Trump’s decision to withdraw from the 2015 Iran nuclear deal could limit the country’s crude exports.

The higher prices have taken some by surprise—the U.S. Energy Information Administration raised its forecast for summer gasoline prices to $2.90, up 17 cents from its expectation a month ago. That would be a nearly 50-cent jump from last summer.

But some economists say the growing importance of energy to the U.S. economy could blunt some of the impact from rising oil prices.

The country has become a more prominent supplier of crude oil and fuel. Domestic production has reached record weekly levels of 10.7 million barrels per day and a lot of it is being exported.

“People don’t understand how we could double crude oil production“ and see higher gas prices, said Tom Kloza, global head of energy analysis at the Oil Price Information Service. “The answer lies in the balance of payment. We are an exporting power right now.”

Refiner Valero Energy Corp. said it wouldn’t expect consumer demand to drop off until oil prices are at $80 to $100.

“Three dollars is like a small fence. You can get through it, you can get over it,” said Patrick DeHaan, petroleum analyst at GasBuddy, a fuel-tracking app. “But $4 is like the electric fence in Jurassic Park. There’s no getting over that.”

Gas prices are still a long ways off from when they reached as high as $4.11 in 2008. And demand hit its highest levels ever last year even as prices rose.

“It’s not only the price point, but it’s how long that price point stays,” Karl Fails, chief commercial officer at Sunoco LP, a wholesale fuel distributor, said during an earnings call Thursday. “We’re very comfortable with the U.S. economy right now. And I think that will also have a bearing on any demand impacts.”

Factors outside the U.S. are pushing oil prices higher. The Organization of the Petroleum Exporting Countries, along with other major oil producers including Russia, agreed in 2016 to curb output in the hopes of eliminating a global glut. Their efforts have been helped by a steep decline in production in Venezuela as the country has fallen into political and economic turmoil.

Airlines and shipping companies will also be paying more for jet fuel and diesel—costs that may be passed along to consumers. Even companies such as Whirlpool Corp. have noted that higher oil prices have boosted the cost of materials.

Robert Lozano, a car salesman in Los Angeles where some gas prices are already above $4, said the dealership’s gas bill has climbed from about $9,000 to about $12,000 a month recently.

Customers are inquiring more about electric vehicles, he said.

“It’s more in the consumer’s mind as to what the most efficient vehicle is.”

WSJ