About Those Gas Prices

CRDaily

Because we rapidly seem to be approaching $4/gallon gasoline (a fact that seems to be largely ignored by mainstream outlets, particularly when compared to the coverage such developments got just a few years ago), I thought I’d look at how gas prices have fared during the Era of Hope and Change. It turns out the Saudis are doing pretty well. Here’s the breakdown:

Price per Gallon of Regular Unleaded Gasoline (data from the Federal Reserve)

January 26, 2009: $1.838

April 18, 2011: $3.844

Price Change: 109.14%

Would anyone care to explain to me why the Obama Administration thinks it’s a good idea to subsidize oil production in South America while curtailing any attempts to exploit our own, local resources, all while the price of gas doubles? Furthermore, why is no attention given to this dramatic price swing when we are in the midst of a rather tenuous economic “recovery”?

Ben “The Helicopter” Bernanke likes to say that inflation has been rather subdued. Looking at the CPI, one could get that impression. But considering that fuel costs typically take up a substantial portion of a household’s budget, a doubling of those costs is going to have significant psychological and economic implications for how the household is able to spend the rest of its budget. When people see the price of gas double, their first instinct tends to be depressive, i.e. they associate higher gas prices with a lousy economy and act as if they are in a lousy economy (even if the economy is performing well- which wouldn’t really apply in this case anyway). They then have to reallocate the rest of their income to account for the higher fuel costs. So, they spend more money on fuel and less on splurges at the mall. So, this is really a double-whammy for economic growth, and yet no one’s talking about it.

On a side note, if you look at the data, you’ll notice that gas prices really take off right as the FED began implementing its QE2 program. I can’t really say anything authoritatively without looking into it more, but the correlation is certainly interesting, particularly considering that one of the main criticisms of the QE2 program was that it would produce significant inflation. I’d say that an approximately 30% price jump over a 6-month period counts as significant. Although some of that may include added risk-premiums to compensate for the Middle East’s increased instability of late. But that’s not likely the entire explanation, as gas prices were on their way up well before the Arabs started getting restless.