The Return Of $3 Gas: Another Threat To The Recovery

Gasoline prices have hit $2.865 for a gallon of regular, according to the Energy Information Administration. That is up nearly 6 cents in a week and 20% from a year ago. The EIA also expects a significant rise in home heating oil.

The reason for the increase is that stocks of gasoline are tight and oil has moved toward $90.

Prices vary from region to region. In California, the price per gallon is already above $3 at $3.141, according to the AAA Fuel Gage Report.

Gasoline prices could go higher still and it would not be a surprise if the national norm becomes $3 a gallon before the end of the year. That means the price of premium would be nearly $3.50.

Part of the trouble–the size of stockpiles–might be solved by refiners, but it is hard to see what the financial incentives would be to add more gasoline to their production instead of taking the profits that higher prices bring.

Gasoline and home heating oil do not go up in lockstep with crude because of variations in refining costs. But, higher gas prices are affected by oil prices as consumers found out when gas prices rose above $4 as crude topped $100 a barrel in 2008.

Crude prices are near $87 and have moved up very sharply over the last month. The value of the dollar and demand will likely move the price per barrel higher.

High gas prices could dampen the economic recovery although this fact was not even part of most models for consumer health and spending released over the last few weeks. No one knows what the tipping point will be at which Americans will begin to cut expenditures in other areas to afford gas, although it is varies  from household to household.

High gas prices are combined with an environment in which real wages have not risen in years and unemployment has remained stubbornly high. Economists had hoped that modest consumer activity would fuel year-end retail activity. That hope will begin to fade if gas prices spike higher.

The federal and state governments are faced with a dilemma with gas. Each collects large amounts of revenue from gasoline taxes. Each knows that very high fuel costs could smother consumer expenditures which could bring down tax receipts on retail purchases.

The government is caught once again between two problems, and both of them are unattractive.

Douglas A. McIntyre