Saturday, March 10, 2012

WXYZ: $4.00 gas! Econobrowser: Not that big a deal

In yesterday's post, I described how the combination of high unemployment and high and rising gas prices has thrice resulted in increased gasoline thefts during the past 4 years. Within hours of my posting that entry, WXYZ uploaded a video that marks an important psychological milestone: Gas prices in metro Detroit jumping over $4.00/gallon.

The price increase extended to my corner gas station, which raised its price for unleaded regular to $3.99/gallon. How long they keep that price is open to question, as the three gas stations just two blocks away were still selling regular at $3.85/gallon this morning. I suspect the corner gas station will lower their price down to $3.87 by Monday. However, a return to the $3.75/gallon I paid on Tuesday is not in the cards any time soon.

That written, and the reactions of people in the WXYZ clip about higher gas prices curbing their other spending notwithstanding, James Hamilton at Econobrowser was surprisingly sanguine earlier this week as he explained Why Current High Oil Prices Won’t Derail the U.S. Economy.
Although the prices of oil and gasoline have risen significantly from their values in October, they are still not back to the levels we saw last spring or in the summer of 2008. There is a good deal of statistical evidence...that an oil price increase that does no more than reverse an earlier decline has a much more limited effect on the economy than if the price of oil surges to a new all-time high.

One reason for this is that much of the impact on the economy of an increase in oil prices comes from abrupt changes in the patterns of consumer spending. For example, one thing we often observe when oil prices spike up is that U.S. consumers suddenly stop buying the less fuel-efficient vehicles that tend to be manufactured in North America. That drop in income for the domestic auto sector is one factor aggravating the overall economic consequences. But if consumers have recently seen even higher prices than they’re paying at the moment, their spending plans and firms’ production plans are likely already to have incorporated that reality.
Although gas prices have risen over $4.00/gallon for the fourth time in as many years, at least in Michigan, they aren't at that level for most of the country yet, and nowhere have they reached record levels, as the graph immediate below shows. Therefore, the impact of the current price rise will be less than for the previous two, which merely slowed down the economic recovery, to say nothing of the first one, which helped put the economy into a tailspin.

The main line of evidence Hamilton looked at was the rapidly improving automobile sales figures, which are showing no sign of a slowdown related to oil prices, at least so far. That's not the only statistic that Hamilton analyzes.
Another series I pay close attention to is the share of total consumer spending that is eaten up by the cost of energy. But the remarkable thing here is that nominal consumer spending on energy goods and services actually declined on a seasonally adjusted basis between September and January, even as the price of gasoline was going up considerably. This represents a combination of an unusually mild winter, very low natural gas prices, and consumers finding ways to reduce their energy consumption and thereby insulate their budgets from some of the damage of higher gasoline prices.
Here's the graph he uses to illustrate his point, which shows the percentage of consumer expenditures devoted to energy for the past 50 years. The blue line is the 6% level, which Hamilton has determined is the threshold for consumers to change their spending behavior.

There is one thing that worries Hamilton, which just happens to be the same thing that worries me.
If tensions with Iran were to escalate, then I would start to worry a good deal more. But based on what has happened to oil prices so far, I find myself in the unusual position of being less concerned about the impact of oil prices on the U.S. economy than many other analysts.
I hope he's right.

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