Do Lower Gas Prices Counteract Higher Unemployment?

Gas prices have fallen below $2 a gallon here in Atlanta, and in many other parts of the country. Unemployment is heading in the opposite direction, up to 6.5% at last count. With gas prices dropping so rapidly from $4, how much cushion will this provide for the economy?

The average price of regular gas over the last twelve months was $3.41, and Americans drove roughly 3 trillion miles over that period. If gas averages $2 over the next 12 months, Americans could save $211 Billion on gasoline over the next year, a savings of around $2000 per family.

How does this compare with the economic impact of lost employment? A 1% rise in unemployment corresponds to roughly 1.5 million jobs lost, and $75 Billion in total income lost at average American salaries. If unemployment rises from 5% (early 2008) to 8%, then the $225 Billion in lost wages may have approximately the same size impact in economic terms as the decrease in gasoline prices.

That’s a surprising result – gasoline is so important to the US economy that the drop in price negates a 3% drop in employment! While that won’t solve the problem of global de-leveraging and the credit crunch, it’s a big cushion to lean on.

Sources and Calculations:

US Total Vehicle Miles: http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm

US Gasoline Prices: http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_history.html

US Unemployment Stats: http://www.bls.gov/news.release/empsit.nr0.htm

US Total Wage Stats: Bureau of Economic Analysis

Gas Price Savings Calculation: 3 trillion miles / 20 mpg = 150 Billion gallons. 150B gals * 1.41 = $211B. The gas price was measured using the last 12 months to Oct. 31, 2008, from the EIA data above. If there are 100 million families in the US, this equates to roughly $2000 per family. Alternately, if the average family has two cars, and drives a total of 25,000 miles per year, then this equals 1250 gallons, and a savings of $1760.

Lost Wages Calculation: From the BLS, there are 154 million people in the labor force, so 1% rise in unemployment = 1.5M additional unemployed. From the BEA report, total US wages are 8 Trillion, or roughly $50,000 per person. 50,000 * 4.5M = $225 Billion

In comparing the magnitude of the two, both the drop in employment and drop in gasoline prices have multiplier effects on the economy that aren’t measured here. This raw comparison accounts for the first-order effects of both changes on the economy.

3 thoughts on “Do Lower Gas Prices Counteract Higher Unemployment?

  1. Thanks for the comment – I focused on driving as a quick way of relating back to an activity that almost all Americans participate in. When we add up all uses of petroleum in the US, the 19+ million barrels of crude used per day are about 45% gasoline, and 55% other uses.

    http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/txt/wpsr.txt

    So we could double the impact numbers – which means that lower gas prices will offset perhaps twice as much unemployment as I originally estimated.

  2. The article focuses only on driving – that is but a portion of the impact the drop in the price of oil has on the economy. How about air travel, home heating oil, electrical generation, chemicals, plastics, business uses? The impact overall has to be measured with a T as in trillions of $ – not a B as in billions of $.

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