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The Wilder View

Just what we need: rising gas prices in the middle of a deep recession

Gas prices are on the rise again; and with the unemployment rate accelerating, already-strapped consumers will pull back even more. Not good. Eventually, though, the rising unemployment rate and slackening demand for gasoline will pass through to lower gas prices.

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The chart illustrates monthly gasoline prices through the February 2009. National gas prices have declined precipitously since July 2008 amid the global recession. However, gas prices have been creeping upward since early January. According to Aysegul Sahin (hat tip, Mark Thoma), this recession is shaping up to be worse than the 1980’s. Therefore, renewed pressure on gasoline prices will squeeze consumers and firms further, worsening an already-beaten economy.

The recent bump in gasoline prices seems counter-intuitive amid building crude inventories and falling crude prices, but it is simply a lagged supply effect. According to the Wall Street Journal:

Refiners saw profits sink as demand declined in mid-2008 and only began to curtail output after hopes for a rebound evaporated in the fall. In December, operators of large refining networks announced reductions in gasoline production and, as a whole, the U.S. is processing well below full capacity. The rise in prices, following a slump that began in July, when gasoline prices were above $4 a gallon, reflects refiners’ success in catching up with slackened demand.

This analysis suggests refiners can only maintain the squeeze as long as demand suffices, and eventually, the rising unemployment rate will drag down gas prices later this year. But until then, consumers are likely to cut back on non-energy goods and services in order to accomodate the higher gasoline prices. Furthermore, rising energy prices will put upward pressure on the headline Consumer Price Index – the index used to measure inflation.


Originally published at the News N Economics blog and reproduced here with the author’s permission.

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