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

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

Drivers gearing up for trips this summer face escalating prices at the gasoline pump, an early sign that $70-a-barrel oil is starting to reach into consumers’ wallets.

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.

U.S. average regular gas priceSource: Energy Information Administration
.a gallon19952000’05’10’150.501.001.502.002.503.003.504.00$4.50

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.

Most expensive states for gasSource: AAA
CaliforniaHawaiiWashingtonAlaskaNevada$0 a gallon$1$2$3$4

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.

Vehicle miles traveledSource: Department of Transportation
.trillion miles2010’11’12’13’14’15’16’172.902.953.

“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.”


9 Comments on "Gas Is Headed for $3. What That Means for the U.S. Economy"

  1. JuanP on Wed, 16th May 2018 9:31 am 

    Will $100 oil kill the US economy?

  2. dave thompson on Wed, 16th May 2018 9:53 am 

    Gas is already $3.00.

  3. kanon on Wed, 16th May 2018 11:31 am 

    Now that the U.S. auto fleet is more pick-up truck and SUV oriented, the sheeple can be fleeced more easily. According to the article. $3 is a small fence while $4 is a barrier. This implies fuel prices will stay around $3. With production limited from Venezuela, Libya, Iraq, and possibly Iran, there may be a period of stable prices for the next few years. No mention of public transportation or bicycles, so the motor vehicle transportation monopoly and the captive customer base is not questioned.

  4. Mike Kramer on Wed, 16th May 2018 1:49 pm 

    I live in PA and we have one of the highest gas taxes in America. We hovered around &2.85 to $2.89 most of the winter. I went past a convenience store and it was $2.87. I came past the same store 10 minutes later and it was $3.09 a gallon and has stayed at that price for over a month.

  5. Anonymouse1 on Wed, 16th May 2018 1:53 pm 

    the uS empire is torn between two equally untenable positions. The first, is the uS’s love of subsidizing its serfs and military adventurism with cheap booze, cheap cigs, toxic, pseudo-foods and of course, cheap energy. The other, is the that uS oil cartel, one of the top tier cartels that rules in washingdum, is increasingly having trouble making making money extracting and selling oil on the cheap, at least the way they used to be able to. ‘Cheap’ energy just isnt working its usual magic anymore, at best, its just keeping things from getting worse. Expensive energy?, well, that option is never on the table.

    Expensive energy in the empire could, potentially, lead to all kinds of undesirable outcomes. Increased energy efficiency, curtailment, less driving. More calls for actual mass-transit and so on. And the goal of uS media and uS corporations, is make sure the serfs focus on what really matters.

    The NFL, supporting the ‘troops’, and dancing with the stars.

  6. Davy on Wed, 16th May 2018 2:36 pm 

    See, weasel, you can make a comment with content even if it is extreme and biased. I knew you didn’t want to break your empty comment record.

  7. Outcast_Searcher on Wed, 16th May 2018 4:24 pm 

    It hasn’t been hurting the economy meaningfully at around $2.70 this year so far.

    The economy was fine with oil near $100 from mid 2010 through mid 2014, and gas prices over $3.

    When GM and Ford are pumping out giant SUV’s and trucks as fast as they can, and Ford is discontinuing almost all of its sedans to focus on lower mileage SUV’s because that’s what people want, it’s pretty silly to be claiming that $3 gasoline is a meaningful problem for the US economy.

    When people can’t get enough high MPG HEV’s, PHEV’s, and BEV’s due to gasoline prices (at $5 to $7 a gallon, I imagine, to make such a bug shift), be sure and get back to us about the “problem”.

    I for one am happy to see higher oil prices.

    Good for my oil investments, which are a long term inflation and oil price hedge. Good for the incentive to find and produce more, due to better profit opportunities. Good for EV’s of all kinds on a relative cost to own basis.

  8. MASTERMIND on Wed, 16th May 2018 5:07 pm 


    The economy was not fine with oil over 100 a barrel. Ever since the oil price spiked in 2006. The US economy has been in another depression.

    The Great Depression 1929-1940 US Economic Growth GDP (1%)

    The Great Recession 2006-2017 US Economic Growth GDP (1.5%)

    If you want to argue the economy didn’t collapse with oil over 100. than that would be true. But to say things were fine is not statistically accurate. Now go back to the message boards where you can censor anyone who argues science and facts.

  9. Kevin Cobley on Wed, 16th May 2018 7:31 pm 

    It’s been over $6 USD a gallon in a Australia for over decades, we haven’t had a recession in 25years, the GFC just blew straight past us. In Europe the prices are even higher, their economies are still ticking along.

    Americans really need to look at themselves and their incessant talk about gas prices.

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