Higher Gas Prices – The Downside of an Improving Economy

Over the past three weeks there have been several major indicators that “The Great Recession” is finally starting to ease and turn the corner.

First, the Case-Shiller index showed the first month-over-month increase in home prices, the first such increase in nearly three years.  In other housing related news, sales of existing homes climbed for the third straight month.

Then there was the better than expected preliminary reading on the second quarter GDP, which showed the economy dipped at only a 1% annual pace between April and June.  Economist had been expecting the second quarter GDP to decline at 1.5%.

Finally, this past Friday, the July job report showed the economy lost “only” 247,000 jobs and unemployment actually dipped from 9.5% to 9.4%, the first such dip in 19 months.  Again, economists were expecting things to get worse, predicting unemployment would jump to 9.6%.

This is the sort of data we need to see on a consistent basis in order to know the economy has finally turned the corner and that this recession — the longest since WWII — is finally over.

That being said, it’s not as if this economic turn around won’t come without a little bit of pain, namely higher oil and gasoline prices.

As both the United States and worldwide economies improve, it is expected that the demand for petroleum (oil) based products will increase as well.  As we know from our econ 101 classes,when supply stays relatively constant and demand increases, prices generally go up.

Since the economy has show significant signs of life over the past several weeks, commodity traders have been eagerly jumping back on the bandwagon, driving the price of oil (and subsequently, gasoline) back up to multi-month highs.

Since July 13, the price of a barrel of crude oil has climbed from $59 to just under $71, a jump of over 20%.  And since July 20, the national average price of gasoline has climbed from $2.45 to $2.63, a jump of over seven percent.

While these price increases pale in comparison to what we experienced last spring and summer, any sudden jump in the price of oil or gasoline could really hurt the economic rebound that appears to be underway.  Hopefully it won’t come to that, but it’s not as if crazier things haven’t happened.

What do you think?  Do you think the price of gas will hit $3 before 2009 is over?  Leave your comments below.

Comments

  1. I definitely believe gas will hit 3.00 before the end of 2009. Will it stay at summer’s end’s high? Probably not. Historically it falls a little off as markets turn to gouge home heating oil starting in October or November. The relative tenuous nature of this economic recovery is such that an exorbitant jump in oil by the speculators and oil companies will all but crush it. When we get serious about stopping this crazy dependence on foreign oil, we will start to earn back our reputation. Until then, forget about it. They have got you and apparently you (we) don’t much care. We would rather point fingers across the political aisles then make fundamental changes…guess what??? That’s what OPEC/Wall Street and the politicians are all banking on….They are right again.

  2. Well within the UK we had recently a 2p increase and by next year the tax will be increased to 17.5% which will result in further increases on fuel by an extra 5p.

    So by next year we will have had a 7p per gallon increase over 6 months.

    It makes me sick!

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