Rising Gas Prices Threaten Economic Growth

  • Posted on: 9 December 2015
  • By: admin

Rising Gas Prices Threaten Economic Growth
Oh how quickly things can change. In our 2013 Outlook presentation, which can be viewed at http://pathlightinvestors.com/category/news-category/pathlight-investors%E2%80%99-2013-outlook-presentation, we noted that the decline in gasoline prices in the fourth quarter of 2012 would provide a certain level of insulation against rising prices.  The negative impacts of the expiration of the payroll tax holiday as well as the automatic spending cuts known as sequestration caused us to come to this conclusion. This insulation was supposed to help the U.S. consumer continue to spend at levels that could offset cuts at the federal level.
But 2013 is off to a rough start for motorists as the average price for a gallon of gasoline has risen from roughly $3.28 per gallon on January 1, 2013, to approximately $3.74 per gallon as of February, 25, 2013, a 14% rise. The chart below depicts the average price of a gallon of gas in blue and crude oil in red.
 It seems somewhat counterintuitive, to say the least, that the prices of both oil and gasoline have been on the rise even though economic data in the U.S. has begun to weaken. We are coming off a fourth quarter which showed a surprising -0.1% GDP figure, and some individual data points to start the year have been less than stellar. 
But the biggest factor in the rise of gasoline prices has been the fact that refining capacity has been taken offline for annual maintenance. This capacity is expected to come back online over the next few weeks.  So the hope is that gas prices will begin to decline, although prices always seem to rise faster than they drop.
We cannot be certain of the impact of these higher gas prices on consumer spending, but given the low rate of growth of the U.S. economy, any reduction in consumer spending will be felt. One potential offset to these higher gas prices this time around could be the rise in home prices.  This rise could help bolster overall confidence which would lead to a lower savings rate, thus offsetting the increased spending on gasoline. We will have to wait and see how this dynamic plays out.