Wednesday, March 28, 2012

Gas Prices, Spending, and Recession

I don't need to look at historical gas prices to know when they the gas prices have gotten relatively high. I just have to wait for the hysterical journalists to start warning about impending doom. You know the old saw - high gas prices somehow translate into lower consumer spending and that translates into recession for everyone. Frankly, it's nonsense. Here's a more thoughtful piece: that has much I agree with, and much I don't. So I'll give my analysis of what happens when gas prices go up.

1) The per-gallon cost is up so some people will drive less or just pay a little more and drive the same amount. I personally have found that my total gasoline expenditure in a month doesn't change that much with the adjustments in gas prices. But let's say, for the sake of argument, people don't reduce the miles traveled and opt to spend more of their budget on gasoline. That means less of the budget to spend on other things. We'll assume the savings/consumption/hoarding balance doesn't change and so all changes are within the consumption category.

2) So the standard story is that the reduction in spending on other goods will spell doom for the economy. High gas prices = lower consumer spending, right? Wrong. High gas prices mean equal spending but distributed somewhat differently. But does that distribution really matter all that much? Instead of going on a long vacation, some people will opt to spend time at home. Same amount spent, just on different things. So what? That's natural business fluctuation, and it likely has little effect on real business spending. Companies have cash cushions to deal with that sort of thing. It's long-run changes that affect businesses, not short-term burps and bubbles.

3) What about businesses that use gas and oil? Their costs go up, don't they? Sure, they go up (and down) as gas prices change. Again, there's a lot of seasonality to this, as gas prices increase in the summer and decrease in the winter. But in the short run why should that matter? So margins get squeezed a little bit. If it's not a long-term change then what's to worry about? If your margins are razor-thin, then this could spell losses - but if your margins are that bad, maybe you shouldn't be in business anyway.

4) What about the firms that are earning more money because of higher gas prices? Namely, the refiners and oil producers. Well they have more money, and stock prices will increase. If it's short-run, employment and such won't change much, so again not much of a big deal. Some people might score a nice capital gain, but that's about it.

My points here are to get people to think about all of the effects, not just the decrease in spending on 'other stuff' that results from more spending on gasoline. I also mean to suggest that short-run fluctuations ain't a big deal. Especially not for bigger businesses that engage in risk management through forwards and futures.

By the way, there's no clear effect of gas prices on the unemployment rate:


  1. I can't tell you how many times I heard from "learned" people that oil price spikes have preceded nearly every US recession. I guess it's more coincidence than anything?

    I suppose I could be convinced otherwise.

    1. I saw this being discussed the other day somewhere... but the long and short of it is that it doesn't always happen, and it might be correlation not causation. In other words, the stuff that causes recessions (inflation of money supply) also causes gas prices to rise (price inflation).

      But also, keep in mind that some of those 'gas price shocks' get followed by price controls (Nixon style). so I think there's a great many conflating factors.