The Impact of Higher Gas Prices, Today and Tomorrow

With gas prices rising nearly 25 percent in the last three months, The Atlantic published a visual guide to what determines the prices of gas. One conclusion we can make is that the White House has very little say over the final price of gasoline. The Energy Information Administration estimates that the costs of treating, shipping and selling gasoline account for 20 percent of gas prices. State and federal taxes, which are low by global standards, account for another 12 percent. Then you have the price of crude oil barrels -- two-thirds of the price of gasoline -- which is comprised of mostly global demand, global investors and Middle East politics. There's just not very much room for the White House to claw down prices this summer ... unless it tries to start another world-wide recession to reduce demand.

In the short term, both the consumer and the economy will suffer from higher gas prices. First, expensive gas hurts U.S. demand. When we import goods, we "export" money to pay for them. When the price of an import increases, more money escapes the economy, reducing wealth and demand. Second, it can hurt U.S. production. All else equal, rising energy costs make it more difficult, or at least more expensive, to move things and people across the country, and this can show up in companies bottom lines.

But let's think about the long term, too. Steve Hayward at the American Enterprise Institute told me that although unleashing the strategic reserves today would shave only pennies off the pump price, the White House's position was detrimental in the long term to our energy posture. In written testimony to the House Natural Resources Committee on March 17, EIA Administrator Richard Newell wrote:

In the longer-term, greater domestic crude oil production no matter the cause - increased development on Federal lands, higher resource potential in current known fields, or wider application of advanced technology  - would impact local economic activity, net oil imports, and the associated U.S. international trade balance resulting from oil imports.

If the U.S. produces more oil from American soil (or water), we can expect a bump up in local economy activity and a bump down in imports, but we shouldn't expect much of a bump in gas prices, which are determined by a global oil market corned by OPEC supply. If we want to spend less on transportation, we have to focus instead on moving around less, moving around more efficiently, or moving around on something cheaper.

Gas shocks cause great pain today because people are stuck driving the same cars along the same commutes they had last month. But it's not hard to find urbanists who think higher gas prices will eventually move Americans away from fuel-inefficient vehicles and distant suburbs into public-transport/bike-friendly cities. The best way to insulate yourself from gas shocks is probably to not drive 40 minutes to and from work every weekday. For millions of families who have settled, or want to settle, in the suburbs, that answer won't do. Then again, that suburban envy was cultivated in a era of cheap gasoline. That era might be over. In the short term, prices can punish us. In the long term, they can shape us.