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BOHANON & STYRING: Today’s rising gas prices unlikely to stall economy

July 20, 2018

Economic Analysis by Cecil Bohanon & Nick CurottPaying more than $3 a gallon for gasoline really took the shine off our Fourth of July festivities. Nationally, the average retail price of gas hit a four-year high and stands at $2.87—about 60 cents higher than a year ago. It is estimated that the recent rise in gas prices will cost the average consumer $360 over the next year.

The prophets of doom and gloom are predicting calamity for the U.S. economy. Some say sticker shock will depress consumer confidence, leading to a cutback in spending. Others say inflation concerns will cause the Federal Reserve to raise interest rates, dampening economic growth. Oh, and let’s not forget, every recent recession has been preceded by two events: an inverted yield curve and higher gas prices.

Fortunately, this hysteria over rising gas prices is overblown. Gas prices are rising primarily due to the strengthening global economy. The United States is in the midst of a 10-year economic expansion, and the unemployment rate is the lowest since 1970. Wealthier consumers want to buy gas, and businesses need it to sustain higher production. Greater demand for gas is pushing up the price. The surge in gas prices is, therefore, a good thing because it is a sign of increasing prosperity.

Yet the media is narrowly focused on less-sizable supply decreases caused by OPEC, Trump’s Iran sanctions and an oil-worker strike in Norway. Oil-supply disruptions increase gas prices and raise costs for businesses and consumers. But even a negative supply shock that pushed gas prices above $4 wouldn’t spell disaster. Americans are much less dependent on oil now than in the past, using 0.4 barrel per $1,000 of GDP today as opposed to 1.1 barrels in 1970.

Moreover, the ascendance of the U.S. shale-oil industry buffers foreign disturbances. Shale-oil deposits can be developed and brought to market much quicker than conventional deposits. Domestic producers are already ramping up production to meet rising global demand. The United States is projected to overtake Saudi Arabia and Russia to become the world’s largest oil producer in 2019. That is, if the Saudis don’t increase their production as they have hinted they might. In either case, more oil comes to market.

So, yes, the geopolitical situation is shaky. But our economy is in a good spot. Nobody likes paying more for gas—least of all us. But to those who say rising gas prices will undermine the economy, we say: it just ain’t so!•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

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