Will rising gas prices thwart economic recovery?

Man standing at gas pump, filling car with gas

Gas prices are still a long way from the all-time highs of 2008, but they’re inching up again. Will rising gas prices thwart the economic recovery? CNNMoney asked that question of Mark Zandi, chief economist for Moody’s Economy.com. Zandi believes that the average nationwide price for a gallon of gas may exceed $3 by Memorial Day; but before you run out to a payday loan store to finance your next fill-up, note that Zandi also believes the increase is not likely to “undermine the recovery.”

Will spending decrease?

The more people have to pay for gas, of course, the less they can spend on other things. According to the CNN article, however, several experts think that this time around, consumers will keep driving and keep spending despite the rising cost of gas. Zandi, for one, expects gas prices to drop back down this coming fall, and that’s why he thinks the current trend won’t reverse recent economic gains. Zandi admits, on the other hand, that we could be headed for trouble if gas prices don’t fall as he expects and $3 per gallon becomes the new norm.

The same old story of supply and demand

Gas prices reached $4.11 in the summer of 2008 partly because of a speculative frenzy, but have remained at less than $3 a gallon since October of that year. In that recent escalation, people actually changed their driving behaviors as a result of gas prices. Not only did they drive fewer miles, they stopped buying SUVs and other gas-guzzlers and started buying smaller cars.

As a result, demand for oil and gas began to decrease, and when Lehman Brothers imploded, gas prices took a rapid dive, dipping to $1.62 per gallon in late December 2008.  As the economy began to turn around and consumer-spending increased, gas prices began to rise steadily.

The rising price of gas may be a favorable sign

As the weather warms up, as workers find jobs, and as people drive more, the demand for gas increases, and prices go up. For those reasons, Zandi believes that the latest round of price hikes may not be a bad thing. The increase may simply mean that the economy is making a turn for the better.

AAA club spokesman Troy Green points out that many oil refineries shut down in March for maintenance, which results in a temporary decrease in supply and an accompanying increase in price. Also, grades of gasoline vary with the season and summer blends contain more clean-burning additives which make gas more expensive. Although there may be logical explanations for the increasing cost of gasoline, it remains to be seen whether personal loan companies will be increasingly called upon to help finance fill-ups at the pumps.