The Economic Ripple Effects of Higher Gasoline Prices

Over the past several months, the popular media has noted record highs in prices at the gas pumps across the United States (CNNMoney, 2007). The steady increase in gas prices, which do not seem likely to decline in the near future, have caused economic analysts and general observers to ask questions about the short- and long-term effects of high prices. Among analysts concerns are the influences that gas prices will exert with respect to changing consumers' spending habits and the increase in consumer interest in purchasing hybrid vehicles as a means of reducing gasoline dependence and the high prices associated with it. While the answers to some of these questions can only be answered over the long-term, economists have determined that the rise in gasoline prices is indeed having a detrimental effect on the U.S. economy, though not the effect that experts expected. Although some analysts predicted that consumers would reduce their driving in response to the elevated prices, it seems that driving has not declined. In fact, far more consumers are willing to scale back their expenditures in other areas in order to compensate for the squeeze on the wallet caused by gas prices (CNNMoney).

There are several reasons for the astronomical increase in gas prices that exceeds even the historical high that occurred during the oil crisis of 1986 (CNNMoney). First, of course, is the war in Iraq. Secondly, political unrest in Nigeria and in the Democratic Republic of the Congo, both oil-rich regions, make these two countries less viable suppliers for U.S. consumers of petroleum-based gasoline (CNNMoney). Still another variable is what the United States perceives as destabilization in Latin America, specifically in Venezuela. According to the Central Intelligence Agency (2007), Venezuela is one of the most robust oil sources in the world and the closest potential provider of oil for the United States; its oil revenues "account for roughly 90% of export earnings, more than 50% of the federal budget revenues, and around 30% of GDP" (n.p.). Nonetheless, the relationship between Venezuela and the U.S. has deteriorated since President Hugo Chavez took office, and Venezuela has begun to forge important trade relationships with minor economic players, such as Cuba, and major economic forces, such as China. All three of these political factors combine to reduce the supply of oil that is made available to the United States. At the same time, Americans' thirst for oil and gas-guzzling vehicles has not abated, and for these reasons, demand is higher than ever.

Because the United States is so dependent upon its vehicles, it is not surprising, perhaps, that the consumption of gasoline has not decreased despite the fact that gas is becoming increasingly cost-prohibitive. As of May 2007, reports indicated that gas was as high as $4.55 per gallon in some parts of the country, and the national average hovered around $3.087 per gallon, with the per-gallon price increasing every day (Hargreaves, 2007). Consumers did not make fewer visits to the gas pump, though. In fact, demand has increased at an average of 1.5 percent for each of the months that gas prices have risen (Hargreaves, 2007).Instead, as other sources of economic data were analyzed, it became evident that there was a significant correlation between rising gas prices and significant declines in the performance of other sectors of the economy. Results of a poll conducted by CNNMoney (2007) indicated that consumers simply began adjusting spending habits in other areas of their budget. Driving, it seems, is considered essential, while other items, especially clothing and small-ticket retail goods, are viewed as disposable (CNNMoney, 2007). Pollsters reported that "40.2 percent of consumers are taking fewer shopping trips, while 37.9 percent... plan to shop closer to home. ...30.7 percent... are shopping for sales more often and 23.5 percent are using more coupons...." (CNNMoney, 2007, para. 22). Almost 25 percent of poll respondents "said...they are spending less on clothing... and 31.1 percent are dining out less" (CNNMoney, 2007, para. 23).

Interestingly, however, consumers have not seemed to change their spending habits with respect to big-ticket purchases, which was another surprise for economic analysts. The CNNMoney (2007) poll indicated that "only one in five [respondents] have delayed major purchases, such as a car, television or furniture" (para. 23). The CNNMoney (2007) article does not offer an explanation for the continued expenditures for luxury goods. This writer, however, suggests that the pervasiveness of credit cards in this country facilitates big-ticket purchases and deludes consumers into believing that they can simply forego smaller expenses, while splurging occasionally on luxury goods and putting them on credit, paying for them little by little. Such spending habits will have serious and significant long-term effects not only for the individual consumer, but also for an increasingly debt-ridden society that seems to be lacking in a basic understanding of budgeting and smart personal spending practices.

The unexpected and unprecedented consumer response to rising gas prices has taken analysts by surprise. The short-term consequences of gas pricing are becoming clear, but the long-term effects may take years to understand and address. What is certain is that significant changes in a single aspect of the economy have dramatic impacts on almost every other sector of the country's economy. Economic dynamics are complex and interconnected, and if the escalating gas prices teach us nothing else, one lesson that we can take away is the fact that our behaviors as consumers have important implications beyond the single variable we believe we are acting against.

References

Central Intelligence Agency. (2007, June 14). Venezuela. CIA World Factbook. [Electronic
Version]. Retrieved on June 15, 2007 from https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html

CNNMoney. (2007, May 21). Gas hits record high, even adjusted for inflation. CNNMoney.
Retrieved on June 15, 2007 from http://money.cnn.com/2007/05/21/news/economy/ record_gas_monday/index.htm.

Hargreaves, S. (2007, May 15). Get ready for $4 gasoline. CNNMoney. Retrieved on June 15, 2007 from http://money.cnn.com/2007/05/07/news/economy/gas_prices/index.htm? postversion=2007051511