An Unreasonable Fear Of High Gas Prices May Throttle Recovery

Gasoline prices have begun to retreat in the US. The latest AAA Fuel Gauge numbers put the average price of regular at $3.886, which means that the cost of a gallon has begun to fall for the first time in months. A week ago, the price was $3.982.

Many American fear that the price of gas will go higher and probably much higher later in the year. The movement of the price of oil recently would indicate this is unlikely even if refineries try to raise prices to improve profit margins. There are too many signs that drivers have turned to public transportation, car pools, and the elimination of all but essential trips to  support an increase in price.

A new Gallup poll shows that the panic over gas prices has not gone away, and this could be bad for the economy in the second half of 2011. The report says, “Americans, who currently report paying an average price of $4 per gallon of gasoline, expect prices to continue to rise to an average of $4.52 this year.”  People expected gas prices to rise to $4.36 when they were asked the same question in March.

What people think will happen is often more important than what it likely to happen when the future of consumer spending is concerned. Many middle class and less wealthy Americans are having trouble making ends meet with gas at current prices. These people are likely to reduce their spending further if they believe gas has another 12% to rise.

Many experts expect oil prices to hover in the $90 to $100 range for several months. Oil prices have shown more of a tendency to plunge than to spike up during the last month. The drop in oil from Libya has been taken into account as a factor of supply. OPEC says it will not increase output, but it will not decrease it either. The appetite for crude in China has not fallen based on what experts can tell, but it has not risen either. Moreover, Americans are probably doing what they can to conserve gas.

Consumer spending is still 60% of American GDP if economists are right. The threat to the growth of this number seemed to recede earlier this year because of a pick-up in the overall economy and tax cuts. Now, people have gone through three months of rising gas prices. That may be a problem for the economy, but it is worse that so many Americans think gas prices will rise further.

Douglas A. McIntyre