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Higher Prices at the Gas Pump

Aug 22, 2012    •    235 Views    •    EST. TIME TO READ: 2 minutes

Sometimes 25 cents at the gas pump can make a huge difference.

Economist James Hamilton explains why with his “rough rule-of thumb” correlation between the price of crude and gas at the pump. When crude increases by $10 a barrel, then the price of gas rises by 25 cents per gallon. As a result, that 25-cent increase per gallon can lead to a ripple of lower spending elsewhere and perhaps, a recession.

From there, Dr. Hamilton reminds us that the oil supply disruptions from the Suez Crisis (1956), the OPEC Embargo (1974), the Iranian Revolution (1978), the Iran/Iraq War (1980), and the first Persian Gulf War (1990) all preceded a recession. And then he hypothesizes that the recent “Great Recession” might indeed relate to the oil price increase of 2007.

At the moment, averaging $3.72 nationally, the price of gas has been rising.

Why? The reasons range from more domestic driving to a refinery fire in California to demand from newly industrialized nations. Also, recalling other crisis supply disruptions, we should keep an eye on the impact of Iranian sanctions. Here though, Dr. Hamilton cites optimism about the US and Chinese economies as the primary cause of rising oil prices.

With gasoline prices having gone up 7.2% during the past 2 months, are we feeling the impact of that extra 25 cents?

Sources: Professor at University of California, San Diego, James Hamilton’s econbrowser blog (which I recommend) was the source here and here of most of my oil ideas and facts as was his recent NBER paper. Also, this WSJ article is a good source of current facts about gas prices as are this and this from econlife.

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