February 22, 2012

Will Rising Gasoline Prices Derail The U.S. Economic Recovery?

By James Picerno of The Capital Speculator

Gasoline prices are on the march once again, reaching an average price of $3.52 a gallon in the U.S. for the week of February 13, according to the Energy Information Administration. Prices have been advancing steadily since mid-December and are now at the highest level since last September. Some analysts predict that we'll see $4-a-gallon soon as a national average. If so, will the rally in fuel costs threaten the economic recovery?

“We’re always over-sensitive to the price of gasoline,” economist Chris Kuehl tells the Kansas City Star. “It just provokes consumers into total depression if the price goes up. … It’s just psychological.”

The last time gasoline prices approached the $4-a-gallon range—last April and May— the economy's momentum slowed and recession risk started climbing. Are we headed for a repeat scenario? In search of clues, let's consider how consumer spending stacks up after subtracting purchases of gasoline. The bulk of U.S. GDP is based on consumption and so there may be warning signs for the macro outlook in the trend for retail sales ex-gasoline purchases.

Gasoline station sales as a share of total retail sales were 11.2% in January, up fractionally from December. But as the chart below shows, the monthly share of gasoline sales has been trending lower since the previous peak of nearly 11.7% set last May. Nonetheless, gasoline is taking a relatively high proportion of retail consumption and so this threat to consumption can't be ignored if prices continue to climb. Nonetheless, there's still some wiggle room before we reach a tipping point. As the chart also shows, the rolling 1-year % change in retail sales ex-gasoline remains quite high, advancing 5.6% for the 12 months through January. That's a relatively strong pace, although the worry is that the recent deceleration in growth will roll on if gas prices continue climbing.


Part of the rise in gas prices comes from stronger demand, courtesy of a growing economy. But the Iranian factor is also in play these days. Fears of a temporary supply shortage are also driving up the price of crude oil.  Gasoline and oil prices don’t always move in lockstep, but if there’s a new Mideast crisis brewing via Iran, it’s a safe bet that higher crude prices will spill over into gasoline.

“It’s hard to see the oil price decreasing, especially with the Iran situation, which I don’t think is going to go away anytime soon,” says Simon Wardell, senior oil analyst at IHS CERA via CNBC.

How bad will it get? Michael Lynch, president of Strategic Energy & Economic Research and a veteran observer of oil markets, thinks there’s still room for optimism. "When people talk about $5 [per] gallon, that's kind of worst-case scenario," he opines via The Chicago Tribune. "If we don't see [more] cutoffs in Iranian oil supplies, or attacks on oil shipping, we're probably close to a peak now."

About the Author - James Picerno is a veteran financial journalist since the early 1990s at Bloomberg, Dow Jones, etc. before becoming an independent writer/analyst/consultant in 2008.  James is also the author of Dynamic Asset Allocation (Bloomberg Financial, 2010) and he writes at The Capital Speculator(EconMatters author archive here)


The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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