We've Passed a Key Gas Price Threshold

By Derek Thompson

A spike in oil prices preceded 10 of the last 11 recessions since World War II. In March, energy prices passed a dangerous threshold that suggests we could be on the verge of number 12.

When energy spending rises above 6% of total expenditures, economist James Hamilton explains, consumers start to change their behavior significantly. In March, with unemployment near 9 percent and families still reeling from the credit crunch, we hit 6.27%.

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Hamilton unpacks the details:

I've noted before that once energy expenditures get above 6% of average consumer spending, we start to see significant changes in spending patterns. We crossed that threshold in March, when 6.27% of every dollar spent went to energy-related goods and services. For lower-income groups, that expenditure share is significantly larger.

The rising price of gas is mostly coming from two sources: rising demand from the developing world and uncertain supply from the Middle East. To see the truly explosive increase in fuel consumption, take a look at this graph comparing emerging countries like China and India with the United States.

oil demand.pngDon't confuse this graph, however, with the impression that China dictates oil prices. The U.S. still consumes about a quarter of the world's oil a little more than half as much as the world's second largest economy. But our oil demand has been pretty stable for the last few decades. It's the surge from abroad that's behind rising prices.


This article available online at:

http://www.theatlantic.com/business/archive/2011/05/weve-passed-a-key-gas-price-threshold/238419/