Gas pain: price of gasoline, heating oil hurts U.S. economy

0 Comments | Current Events, Nov 11, 2005

WASHINGTON D.C. -- Ouch! Gas pains are hurting millions of Americans--not in their stomachs but in their bank accounts. And the pain caused by rising prices at the pump may be a lot harder to get rid of than a stomachache.

At the time CE went to press, the average price of a gallon of regular gasoline in the United States stood at $2.74--almost double what it was in 2003. And economists predict that the price will continue to trend upward. Moreover, the price of heating oil this winter is expected to be at least 30 percent higher than last year's prices, especially in the U.S. Midwest. Natural gas is expected to cost households an average 48 percent more than last year.

Not Good News

All that is not good news lot the U.S. economy. The reason is that abundant, cheap oil is essential to our way of life. Without it, our economy would simply grind to a halt and society as we know it would collapse. We need oil not only to produce gasoline but also to produce electricity and to keep our homes, schools, and businesses warm in the winter. Almost all the items we buy, from clothing to food to televisions to furniture, have to be transported from factories to distribution centers to stores, usually by truck. When the price of fuel goes up, manufacturers must absorb increased transportation costs. They can absorb those costs by raising prices, cutting profits, or doing both. Each of those actions hurts the economy.

Raising prices causes inflation, an economic condition in which prices in general rise, causing pressure to increase wages and salaries so that people can afford to pay the higher prices. The problem, say economists, is that wages never keep up with rising prices, so people become poorer and the economy grows weaker.

Cutting profits forces businesses to cut costs in other ways, such as laying off workers. With more people out of work, fewer can buy goods. That results in the sale of fewer goods, forcing even more layoffs and causing the economy to spiral downward.

The good news is that inflation hasn't turned into a monster--yet. Even though consumer prices in September took the biggest jump in 23 years, the price increase was almost all in gasoline, oil, and natural gas. The prices for other goods did not jump up as much. Economists say the U.S. economy is still healthy, but it may not remain so if energy prices continue to rise.

Supply and Demand

What has caused the price of gasoline, heating oil, and natural gas to rise so quickly?

A small part of the answer lies in the damage done by Hurricanes Katrina and Rita, which slowed the production of oil from drilling platforms in the Gulf of Mexico. Because the hurricanes also damaged oil refineries on the Gulf Coast, less oil and gasoline were able to reach the market. According to the economic principle of supply and demand, when supplies of a product remain the same and demand for it increases, the product's price tends to rise. When supplies rise and demand decreases, prices tend to drop.

The major cause of increasing gas prices is the rapidly increasing world demand for oil. Most of this comes from two nations, India and China, which have the world's two fastest-growing economies. Both countries are industrializing at a rapid rate, building roads and factories and driving cars that demand oil, gas, and other sources of energy.

By 2010, India will have 36 times more cars than it did in 1990; China will have 90 times more cars by then. More than 4.5 million new gasoline-powered vehicles are expected to hit the roads in China this year alone.

At the same time, production of oil from oil-exporting countries has increased only slightly. The result: The price of a barrel of crude (or unrefined) oil has gone from an average of $30 in 2004 to around $60 this mid-October. So tight is the oil market now that any disruption to the world oil supply--a war, or a boycott similar to the one that happened in 1973 (see Time Trip)--could plunge the world economy into a severe crisis.

What Can Be Done

How can industrial nations such as the United States prevent rising energy prices from causing economic damage?

Economists say it can be done by increasing the supply of oil, reducing the demand for it, or a combination of the two.

The Bush administration has pushed a controversial program to increase the supply of oil by looking to open new oil fields, most notably along Alaska's north shore. The administration also wants to build new refineries to increase the supply of gasoline. Critics of that plan argue that the administration is not doing enough to decrease demand by promoting conservation and researching the development of energy sources other than oil.

What both sides do agree on is that our "gas pain," with its increasing cost to the economy, is not going to go away.

Consider This ... In what ways will higher gas and oil prices affect your family? How could you and your family use less energy?

Gas pain

Get Talking

Ask students: Are you aware of the recent rise in the price of gasoline? What are some of the causes for the increase? How has it affected your life? How do you think it has affected the U.S. economy as a whole?