Energy and the Economy


With the price of gasoline escalating again to over $4 per gallon, concerns are being raised about its possible impact on the economy. What many are overlooking is that the price of natural gas is currently at its lowest level in nearly ten years.

The price of gasoline normally rises at this time of the year, as refiners switch their blend for the summer driving season. However, this year there are other causes involved, which are making the price increase more pronounced.

The situation in Iran is clearly having an impact on world oil prices.  Last year oil markets had to deal with Libya, where 3/4 of its oil production was lost for a period of time due to civil war.  Iran has approximately double the oil production of Libya, though currently is still producing the bulk of oil.  Despite Iran’s vast oil production it lack refineries, and has to import a portion of gasoline to meet domestic demand.  This implies that Iran needs to cooperate with other countries, otherwise it couldn’t satisfy the driving needs of its own population.

The other factor impacting the price of oil is that the U.S. dollar has weakened versus the Euro.  Because oil is a global commodity, when the dollar is weaker the price of oil tends to rise.  The fact that the Euro has strengthened is somewhat of a positive, as problems in Europe were causing much of the volatility in the stock market last year. While the situation in Europe has stabilized to some extent, it is not likely that the Euro will be a major source of strength from here, as a number of countries in Europe will likely be in a recession this year.

In Southern California the main cost of energy for most is gasoline, but for much of the country heating can be just as significant. A mild winter has helped to lower heating costs, but more important natural gas production has increased dramatically in recent years due to a new production technique called hydraulic fracturing or fracking. This involves obtaining natural gas from shale rock deposits. Natural gas also provides about 25% of the raw material for generating electricity in this country. Lower natural gas prices are very significant for many manufacturers, as energy is a key cost component for many products.

Most likely the price of gasoline will remain relatively high for a few more months, and then retreat some assuming of course the situation in Iran doesn’t escalate into a war. Saudi Arabia is already increasing its oil production to make up for any potential shortfall. In California gasoline prices are significantly higher than the rest of the country for two reasons. One is a more stringent refining standard because of our pollution problems. The other is that our taxes on gasoline are approximately 20 cents a gallon higher than the national average, due primarily to our high sales tax.

For now lower heating bills for most of the country are offsetting higher gasoline prices, so the impact on consumer spending is not significant. When the heating season ends higher gasoline prices could then have more of a negative impact on the economy, though the effect would not be large, as long as gasoline prices don’t rise much from here.


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