High Oil Prices, the Return of $3 Gas a Threat to the Economy

By Douglas A. McIntyre Updated Jan 12, 4:39AM EST · Published Jan 10, 6:35AM EST

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Crude oil prices are well over $63 a barrel, and some experts believe the next stop is $70. Over the past year, crude prices have been as low as $44, which has kept gasoline prices relatively low. If $70 becomes the new normal for a long period, $3 a gallon gas prices are just behind it. That cannot be good for the economy in almost all cases.

The price of an average gallon of regular nationwide is $2.50, up from $2.36 a year ago. The increase is not nearly as much as the jump in crude. However, since the prices move in close to lockstep, gas prices will rise soon.

Gas prices are already above $3 in some places in the United States. This includes California, Hawaii and Alaska. Oregon has a few pennies to go to breach the $3 level. The price in New York, Pennsylvania and Connecticut are also close. Gas prices are still relatively low in states near the refineries south of Houston on the Gulf Coast. For example, the average price for a gallon of regular in Texas is $2.25. No matter how high gas prices go, the distribution across the country will be very uneven.

Among the things that could tighten supply is OPEC keeping production levels low or a major supply interruption elsewhere. Friction between the United States and large oil producer Iran could cut supplies. Some of this comes from the president’s comments about relationships between the two countries. His comments about North Korea also have raised the specter of an ugly international incident that could spike oil prices. As a matter of fact, the president may represent the single greatest upward pressure on crude. On the other side of the equation that determines prices, a strengthening global economy will move demand for crude higher.

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It has been about 30 months since U.S. gas prices last hovered just below $3. Economists expressed concern then that consumer spending could be threatened. This is particularly true for people who need to drive any substantial distance each day, and worse in the high gas price states. Since consumer spending is over two-thirds of gross domestic product, the current strong American economy faces a gas price risk.

Oil needs to move up less than $10 for gas to reach $3, and then problems with the American economy to become much more likely.

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.