Tags: michael | carr | gasoline | prices | us | economy

Gasoline Prices Really Do Sway the Economy

Wednesday, 02 Mar 2011 10:23 AM

By Michael Carr

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With gasoline prices firmly above $3 a gallon at the pump, many consumers are getting worried about the impact higher prices will have on their family finances.

The reality is that paying for a $1 increase in the price of a gallon of gas takes about 2 percent of the average family’s income, according to data maintained by the government’s Bureau of Transportation Statistics.

Over the past year, prices are up an average of 52 cents a gallon, costing the average family almost $550. This is an amount that could have been spent on other stuff, and if increases continue, there will be less and less other stuff in the family budget. Decreased consumer demand could hurt a still struggling economy.

Oil prices have a hidden and large impact on consumers. Gasoline futures prices now represent about percent of the price of a barrel of oil. That government agency reports the average car uses 525 gallons of gas a year, which means a sustained $1 increase in the price of oil costs the average consumer more than $15 a year.

Economic impact is also significant. If oil moves up by $10 a barrel and stays there, gross domestic product, the broadest measure of economic activity can decline by 0.15 percent. In the last quarter of 2010, GDP increased by 2.8 percent, meaning higher gas prices can have a significant negative impact on GDP.

On the bright side, oil prices are volatile. Prices may fall just as rapidly as they rose. Declining prices at the pump could boost economic growth, a welcome development in an economy plagued by high unemployment and declining home prices.

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