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Why High Gasoline Prices are Causing the Drop in GDP Growth

Lost in the furor over the debt crisis last week came the news that the U.S. economy expanded at an annual rate of only 0.4 percent in the first quarter and 1.3 percent in the second. As these numbers were well below what economists were expecting, the revelation that the US was not coming out of the "great recession" was quite a shock for those who have not been paying attention.

Even further down in the news stories were revisions to the older GDP numbers that had the U.S. rebounding smartly from the 2007 to 2009 recession. It seems the official GDP numbers that are released shortly after the close of every quarter are partly guesstimates assembled by people biased is to make the incumbent administration look good. These of course are seized upon by the financial press as evidence that the economy is getting better and that projections of a 3 percent annual growth rate starting any day now are plausible.

Revisions to U.S. GDP numbers going back to 2003 show that the GDP shrank by 5.1 percent from the 4th quarter of 2007 to the 2nd quarter of 2009 rather than the 4.1 percent that had been previously reported. Although our economy grew during the 18 months between July 2009 and the end of 2010, since then the economy has likely been flat and may be actually retracting. We won't know for another year or two when better numbers are available.

Precedent suggests that when the next revision to the GDP numbers is issued in the summer of 2012, it will show that the 1.3 annual growth rate being claimed for the second quarter of 2011 is likely to be overstated as badly as previous preliminary estimates.

What is most interesting in the commentary surrounding the precipitous drop in GDP growth is that a few in the main stream media are beginning to look at high gasoline prices as one of the primary factors restraining economic growth.

The U.S. burns about 19 million barrels or 800 million gallons of oil in the form of gasoline, diesel, jet fuel, propane, fuel oil, etc. each day. About half of this is in the form of gasoline that goes into our 250 million cars and light trucks. Twenty years ago we were paying about $1.20 a gallon for our gasoline and somewhat less for other grades of fuel. Ten years ago this price of gasoline still averaged only $1.44 a gallon. Then things started happening.

In 2004 gasoline prices climbed to an average of $1.98. Four years later the average for 2008 was $3.31 with a brief high in June and July well above $4 a gallon followed by a collapse that took the average price of a gallon all the way down to $1.83 by January of 2009.

The collapse in prices was short lived for by the end of 2009 we were back up to $2.67 with the average for the year coming in at $2.40 - nearly a dollar a gallon less than the average for 2008. If we burn 800 million gallons of oil a day, then a dollar increase or decrease in the price amounts to about $800 million more or less money going to fill our gas tanks. Multiply this by 365 and you can see that about $300 billion per year in consumer spending power is either taken away by the gas pump or can be used for other expenditures.

Now consumption of fuel does drop as prices go up. U.S. oil consumption actually peaked back in August of 2005 at 671 million barrels for the month. When gasoline was at an all-time high in the summer of 2008, and selling for nearly double the 2005 price, and the economy was contracting rapidly, consumption fell to 597 million barrels during August -- the peak of the driving season. This was about an 11 percent drop from three years earlier.

The important point is that between the $1.44 a gallon gasoline of 2002 and the $4.20 a gallon gasoline of July 2008, the cost of filling our collective fuel tanks, rose by some $2.2 billion a day. With half of this money leaving the country to pay for oil imports, it is not difficult to figure out why the economy has not been doing too well of late. Conversely, when gasoline fell from $4.20 a gallon in July to $1.84 in December of 2008, $1.8 billion a day reappeared in our collective pockets and the economy started to revive.

The situation we are facing today is similar to that of 2008, yet is different in that the price spike of 2008 was of relatively short duration. At the end of February 2008 gasoline was averaging $3.18 and 19 weeks later in early July it was at $4.16, a dollar increase. The fall from the peak was even more spectacular, for in 12 weeks gasoline prices had declined by one dollar and six weeks later another dollar. This drop put money back into consumers' pockets at the rate of $600 billion a year - nearly the same amount as the federal stimulus provided and a lot quicker.

This year's gasoline price run-up started in early December 2010 with gasoline at $3.01 a gallon. Twenty five weeks later in early May prices peaked the requisite dollar higher at $4.01. It is now 12 weeks since the May 2011 peak. Prices have fallen about 25 cents a gallon and at the minute do not seem to be showing signs of falling much further. London's Brent crude, which is now the real benchmark for world oil prices, rose from $80 a barrel last summer to $125 in May and has been trading above $115 ever since.

The massive increase in money coming out of consumers' pockets to pay for fuels is still going on. It is sucking the life out of our economy and yet few notice.

By. Tom Whipple

Source: Post Carbon

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Leave a comment
  • Anonymous on August 09 2011 said:
    @Tom Whipple: I hear what you're saying, but if the buildup of carbon dioxide in our planet's atmosphere is so serious as to justify the regulatory aggression now being waged against the auto industry (over 50 miles per gallon CAFE by 2025), then in my opinion cheap gasoline would only make matters worse. High gasoline prices, unlike draconian CAFE requirements, are a harsh but also flexible incentive for us Americans to reduce our carbon footprints in whatever way we, as individuals, find most convenient for our individual circumstances. You can't say that about laws that would require everyone to pay thousands of dollars extra for cars no bigger than a Honda Fit.
  • Anonymous on August 10 2011 said:
    Yeah it makes since. As the prices of gasoline skyrocketed it caused the value of the dollar to plummet, throwing us into a recession. The Value of gold appeared to be going up but actually the value of the dollar was just decreasing. ;-) pay a dollar per gallon
  • Anonymous on August 10 2011 said:
    Excellent article. Very informative. It deserves the widest circulation.

Leave a comment

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