Dr. Mike Walden

Dr. Mike Walden

Gas prices rebound with economy

By Dr. Mike Walden

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I got into a little trouble recently when I told a reporter that the rise in gas prices can be viewed as a positive indicator for the economy. I received several e-mails and calls from people saying I was out of touch and even in the pocket of the oil companies.

Of course, I understand higher gas prices hit everyone’s budget. After all, my decade-old sport-utility vehicle gulps gas. But the relatively low gas prices we enjoyed in 2008 and 2009 — for a while dipping below $2 a gallon — weren’t due to any great improvement in energy markets. Instead, they were the result of something bad: the worldwide recession.

When the economy is weak, it makes sense that less gasoline is used. During recessions, businesses produce and sell less, so there’s less shipping of products across the country. Also, with higher unemployment and tighter family finances, there’s less travel for work, shopping and vacations.

It wasn’t only our country that became a more frugal user of gas. The same thing happened across the world.

The bottom of the recession occurred in mid-2009. Since then, factories have been producing more, and more than 1 million jobs have been created nationwide. Driving has crept higher and so, too, has gas usage. All this additional economic activity has brought gas prices back to prerecessionary levels.

The conclusion: The low gas prices we enjoyed in 2009 were an aberration due to the poor economy. We’re now back to “normal” prices of $3 or more for gas as the economy has begun to crawl back.

Yet, this creates other worries. Could a continuing rise in gas prices trigger another recession? Aren’t recessions always preceded by a jump in gas prices?

While more expensive gas does slow our economic engine, the economic car can still move forward if our speed is great enough. Studies of the economy have found a 33 percent rise in gas prices typically will cut the economy’s growth rate by 0.3 percentage points. Most economists estimate today’s economy is expanding in the 2.5 percent to 3 percent range. So, a 33 percent rise in gas prices — for example, from $3 to $4 a gallon — would cut economic growth to between 2.2 and 2.7 percent. This is still growth — a recession occurs when the growth rate is negative — but it is slower growth.

So what about the future? Do economists see higher gas prices? The answer is yes, as long as the economy improves and driving increases. While $4 a gallon gas may not happen in 2011, it eventually will. Few of us will be happy, but we will adapt.

Dr. Mike Walden is a William Neal Reynolds professor and a N.C. Cooperative Extension economist at N.C. State University.

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