The anticipation of summer usually brings thoughts of road trips, but this year, those dreams might be tempered by the burgeoning cost of gasoline. For many Americans, the surge in gas prices is more than just a minor inconvenience — it’s a tangible strain on budgets already stretched thin by broad-based inflation. Since the start of the year, the average national price of gas has risen by more than 12%, ahead of the usual seasonal uptick in prices. As of late-March, the average price per gallon was $3.53, $0.26 higher than just a month ago. This trend is expected to continue, with some analysts predicting prices to reach as high as $5 per gallon by the end of summer.
The increase in gas prices has sparked concerns among consumers and businesses alike, with JPMorgan recently issuing a warning about the potential impact on the economy. Coupled with geopolitical unrest in oil-producing regions and a decrease in supply due to production cuts, rising gas prices have become a major topic of conversation. The question on everyone’s mind is clear: how high can they go, and what does it mean for the population and the American economy?
The Current Pump Price Pinch
The sticker shock at gas stations across America is telling a story of its own; for the first time since last year, the average price for a gallon of gas is higher on a year-over-year basis. It’s a price hike that’s concerning, not just for day-to-day commuters, but for the overall economy. Gasoline holds a key role in consumer spending, and the spike in prices couldn’t come at a worse time for a country already grappling with inflated prices.
What’s Fueling These Increases?
The litany of causes for this surge is as diverse as it is concerning. Key among them is the ongoing conflict between Russia and Ukraine, which has directly resulted in targeted attacks on Russian oil infrastructure — a double-edged sword that damages global supply while bolstering Russia’s fuel needs. Experts also point to potential future disruptions in the Middle East, a veritable powder keg of oil production that, if unsettled, could send shockwaves throughout the energy market. Ultimately, it’s a harrowing symphony of global politics and instability that’s pushing prices higher.
But it’s not just foreign conflicts that are helping to drive prices up at the pump. Several OPEC+ countries have decided to extend their voluntary reduction of oil production by an additional 2.2 million barrels per day throughout the second quarter of 2024. This move is in line with the ongoing efforts to “stabilize” global oil markets, but it effectively limits the supply of crude oil and subsequently drives up prices.
Russia, too, has announced further measures to decrease its oil output and exports by an additional 471,000 barrels per day (bpd) for the second quarter. This decision aligns with the actions by select OPEC+ member countries, intensifying efforts to manage global oil availability and pricing. Following a reduction of 500,000 bpd in crude oil and fuel exports during the first quarter, Russia’s move to further decrease exports is expected to contribute to the rise in fuel prices.
JPMorgan’s Dire Prediction
The financial giant recently issued a somber forecast, predicting that mounting global tensions, especially those involving Russia, could propel oil prices to nearly $100 a barrel by September. “At face value, and assuming no policy, supply or demand response, Russia’s actions could push Brent oil price to $90 already in April, reach mid-$90 by May and close to $100 by September,” JPMorgan analysts said.
According to some experts, this isn’t a prediction to be taken lightly — a benchmark crude oil price of around $100 could set the stage for even more elevated gasoline prices, a reality that could redefine transportation costs and impact the world’s recovery from a tormented economic landscape. The forecast also amplifies concerns for inflation, potentially pushing up consumer prices and curtailing demand for goods and services.
The Potential Fallout
The economic and societal impacts of soaring fuel costs touch every aspect of daily life and national commerce. The reach of these high prices extends beyond the gas tank, influencing everything from public transportation fares to the cost of goods and services, each ratcheting up its own inflationary pressure. For individual consumers, the advent of $5 per gallon gas poses the threat of substantial budgetary strain — disposable incomes throttled by the need to simply maintain mobility. And for producers and distributors of goods, the cost of transporting products to market will inevitably increase, causing a ripple effect across the entire supply chain.
According to Fed Chair Jerome Powell, for each $10 increment in crude oil prices per barrel, inflation experiences a 0.2% uptick, while economic growth simultaneously takes a hit, decreasing by 0.1%. With Crude Oil prices already on the rise, and analysts predicting a potential surge to $100 per barrel, the situation paints a grim picture for both consumers and the economy at large. And while the Strategic Petroleum Reserve (SPR) is often called upon to cushion the blow of supply shocks, it was only designed to offset temporary disruptions, leaving little in the way of a lasting solution.
With the SPR already near record lows after being tapped by the Biden administration to offset previous price increases, there is now a looming fear that any future disruptions may not be so easily offset. And although the U.S. is the world’s largest oil producer, it still heavily relies on imports, making it vulnerable to global supply shocks and price fluctuations.
The 1973 Arab Oil Embargo serves as a stark reminder of the impact that supply shocks can have on both the economy and consumers. Initiated by the Organization of Arab Petroleum Exporting Countries (OAPEC) in response to U.S. support for Israel during the Yom Kippur War, the embargo targeted nations perceived as backing Israel. Consequently, oil prices quadrupled, wreaking havoc on economies heavily reliant on oil imports, particularly in the United States and Western Europe. Americans faced long lines at gas stations, shortages of heating oil, and skyrocketing prices for everyday goods with the impact felt well beyond the oil industry. While the 1973 embargo may seem like a distant memory, it serves as a cautionary tale for the consequences of global supply shocks that can’t be easily offset by tapping into emergency reserves.
Consumer Behavior and Socioeconomic Repercussions
The potential for gas prices to impact consumer behavior is not to be underestimated; costlier commutes could lead to fewer trips and more intentionality in travel decisions, especially for non-essential journeys. Such shifts in mobility have cascading effects on businesses, particularly those in the tourism, hospitality, and retail sectors. These industries are heavily reliant on consumer spending, and when discretionary income shrinks due to higher gas prices, it can mean losses for businesses. In some cases, it may even lead to job losses and economic downturns in regions heavily reliant on these industries.
A study published in the National Bureau of Economic Research found that money allocated to gasoline directly competes with funds meant for other expenditures. Should gas prices continue rising as analysts expect, expenditure on travel, leisure activities, and even food consumption may decrease as households cope with the added gas expense. Discretionary expenditure, which includes non-essential goods and services, is closely linked to consumer confidence. When confidence erodes due to soaring gas prices, it can have long-term consequences for an already fragile economy.
At the national level, the specter of $100 oil looms large over economic policy and growth projections. Higher energy costs equate to higher operational costs for businesses, which are often passed on to consumers in the form of higher prices for a wide array of products. The potential for a broad economic slowdown, stoked by inflation and the attendant reduction in consumer spending, is a scenario that policymakers and central bankers are keen to avoid. However, given the volatile nature of the global oil market, this outcome may be difficult to avert — especially if geopolitical tensions escalate and supply disruptions become more common.
Preparing for Potential Volatility
Many Americans may soon face the stark reality that their summer travel plans could come with an unanticipated premium. Despite reassuring forecasts from the current administration, the potential for continued upticks in oil prices and their impact on everyday life is an ongoing concern. In an environment where inflation concerns loom large, a growing number of consumers are seeking ways to mitigate the rising cost of living. Traditionally regarded as a bulwark against inflation and economic instability, gold offers potential solace for Americans looking to hedge against rising energy prices.
Gold’s allure as a hedge against rising prices has been well documented, with the precious metal often exhibiting a positive correlation with inflation. Between 1973 and 1979, when the United States grappled with the consequences of disruptions in oil prices and energy shortages, the price of the yellow metal yielded an average annual return of 35% — far surpassing other traditional asset classes.
With gas prices expected to continue heading north, pushing up the overall cost of living along with it, some experts predict a similar trend for gold’s value in the coming months. Combined with the potential for supply disruptions and intensifying conflicts in Ukraine and the Middle East, all signs point to a potentially volatile future for oil prices. And as history has shown, such events can be a boom for the yellow metal’s performance.
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