Following a March retail sales report, many analysts and mainstream media outlets expressed relief that the American consumer has taken high gas prices in stride.
And to his credit, our own Matthew Weinschenk made that very prediction about gas prices last month.
But as much as I’d like to, I can’t share in the abundance of optimism. To the contrary, I believe gas prices still pose a serious threat to the economy.
Make no mistake, March’s retail numbers may be a step in the right direction, but it will take more than one strong month of sales to shield the U.S. economy from higher prices at the pumps.
Consider that many areas of the country are already coping with gas prices north of $4 a gallon and are now dreading $5 gas.
In fact, a CNN poll last week showed that 79% of Americans fully expect gas to hit $5 a gallon this year. And 71% of those polled said rising gas prices are causing a financial burden.
That trepidation is well founded, considering Americans are faced not just with rising gas prices, but higher costs across the board. They’re also earning less.
Consumer prices rose 0.3% in March, while workers’ earnings fell 0.4%. And the U.S. minimum wage, when adjusted for inflation, is actually lower today than it was in 1968.
Aside from gas, price increases have been felt most acutely at the grocery store. Meats, cheeses and other foods now cost 6.9% more than they did just last year, according to the American Farm Bureau Federation.
Eventually, Americans will have to choose between gas and groceries – and food is likely to win out. That means more consumers will be staying home, rather than dining out or going on vacations.
Bad for Business
It’s not just the U.S. consumer that’s hurting, either.
Small businesses – the other engine of economic growth – are also feeling the pain.
In a new survey by the U.S. Chamber of Commerce, 24% of small businesses polled named high gas prices as the key factor preventing them from hiring – up from 10% in January.
Only 22% of small businesses are bringing on new employees. Overall, employers only added 120,000 jobs in March, half the average pace in the preceding three months.
So the bottom line is this: After surging more than 10% already this year, gas prices have both consumers and businesses on the run.
And it’s only going to get worse from here on out.
Basically, a $1 rise in crude price per barrel on average produces $0.036 rise at the pump (for regular). And every $0.01 increase in the retail price of gasoline translates into about $1 billion annually of added costs for consumers.
And oil prices, which have been over $100 a barrel for most of the year, aren’t going down anytime soon. In fact, they’re likely going higher.
The biggest factor contributing to the recent spike in oil and gas prices has been the political scrum between Iran and the West. If Iran were to follow through on its threats to close the Strait of Hormuz, oil prices could surge as high as $200 a barrel in a matter of days. And even if it doesn’t, the specter of armed conflict in the region looms large.
Remember, Libya’s revolution took oil prices from $83.13 a barrel on February 15 to $113.39 a barrel on April 29.
That’s a 36% surge in a period of about two-and-a-half months. And at that time, Libya was only the world’s seventeenth-biggest oil producer. Iran is the world’s fourth-largest oil producer.
Domestically, the picture isn’t much brighter. Many U.S. refineries are going broke because they’re antiquated and can’t process the cheaper, heavier crude coming in from Canada’s oil sands.
Nearly 50% of the refining capacity on the East Coast has either shut down or may shut down within the next few months.
Refineries that have been upgraded and expanded along the U.S. Gulf Coast are capable of turning heavier oil into gasoline, but there’s not enough infrastructure to efficiently transport the product.
Given that, it may be more prudent to wait for the fall before we lay to rest our fears about soaring gas prices – particularly if you live in the Northeast.