How Gas Prices Affect The Economy

By Jean Folger | May 24, 2011 AAA
How Gas Prices Affect The Economy

Volatile gas prices have taken center stage in the media this year as the national average for a gallon of gasoline has topped $4. Political unrest, the impending hurricane season, flooding in the Mississippi and increased demand during the summer driving season could push prices even further. At the individual level, higher gas prices mean that each of us will pay more at the gas pump, leaving less to spend on other goods and services. But higher gas prices affect more than just the cost to fill up at the gas station; higher gas prices have an effect on the broader economy. (Don't believe the water-cooler talk. Big oil companies aren't to blame for high prices. Check out Why You Can't Influence Gas Prices.)

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Retailers
A very basic side effect of high gas prices is that discretionary spending goes down. Higher gas prices also mean that shoppers will drive less to conduct their purchases. According to MasterCard Advisors, online shopping in the United States during April, 2011, grew by its fastest rate in almost four years. Studies based on search engine analytics support this, showing that search volume is directly tied to gas prices. According Marin Software, searches for online shopping increase dramatically along with gas prices. Retailers are further squeezed as they are forced to pass on the expenses associated with increased shipping costs to consumers. Anything that has to be shipped or transported - from apples to electronics - could cost more as gas prices rise.

Auto Industry
The automobile industry has responded to rising gasoline prices and the need to reduce our dependence on oil by manufacturing smaller, more fuel-efficient cars, hybrids and, most recently, all electric cars that can travel up to 100 miles between charges. Consumers have supported this move; sales of hybrids in the United States, for example, grew by 33.9% during the first quarter of 2011, compared with the same period during 2010. In addition, small vehicles currently account for about a quarter of all U.S. auto sales.

Public Transportation
Higher gas prices are resulting in noticeable increases in some public transportation ridership. According to the American Public Transportation Association, the Raleigh-Durham-Chapel Hill region of North Carolina saw an 18% increase in riders for the express bus that connects the three cities during April, 2011, compared to the same month last year. Riders on New Mexico's Rail Runner, a commuter train that provides service between Santa Fe and Albuquerque, increased by 14% for the same month. Though not all cities have experienced similar growth, shared and public transportation may become more appealing if gas prices continue to rise.

Work and School Week
Some businesses, including colleges, have elected to go with four-day weeks to limit their employees' or students' financial burden for commuting. For example, in 2008, Southwestern Community College announced a four-day school week to help students and staff save on gas money. This is a growing trend at higher learning institutions. Not all businesses have the flexibility to make this decision, but for some it has provided a welcome opportunity to save on weekly commuting expenses.

Hiring
Job growth is carefully watched as an indicator of the recovering economy. And though an encouraging 244,000 jobs were added in the U.S. during the month of April, some economists warn that rising gas prices could negatively impact the economic recovery in terms of hiring practices. Rising gas prices this year have forced some businesses to reevaluate their hiring plans, holding off because they are uncertain about the economy's health. Less discretionary spending results in decreased sales, both of which can influence a company's ability to hire.

New Jobs and Freelancers
Many job candidates have to weigh prospective positions against the costs associated with the commute. Some workers who have been offered new jobs have been forced to turn down the position simply because the costs to get to and from work would eat up such a large percentage of the salary. Freelancers can also be affected by higher gas prices, limiting the geographical region in which they will do business because commuting costs make it impossible for some gigs to be profitable.

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The Bottom Line
Though economists and analysts may argue about the extent to which gas prices have an effect on the economy, there is, at the least, a correlation between consumer confidence, spending habits and gas prices. A recent Gallup poll in the United States, for example, showed that individuals' views of the economy appear to be inversely correlated to the price of gasoline. As gas prices increase, a decreasing percentage of Gallup poll respondents felt that the economy is "getting better."

Gas prices may continue to rise - some analysts have even predicted $6 gas by the end of summer - but it is possible, too, that gas prices will stabilize, perhaps giving the economy a better chance at recovery. (To learn more, read What Determines Gas Prices?)

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