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:

US Gasoline Prices:

US Unemployment Stats:

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.

Why are Oil Prices so High? An Energy Primer

10/21/2008 Update:Supply and Demand have now driven prices down significantly, as fears of a global depression, and reduced driving worldwide, have led to decreased use of oil. How significant was speculation in the runup to $147 oil? Certainly it played a part, just as speculation played a part in the dot com boom and the housing bubble. But oil is still up 700% from its lows around the turn of the century, and that’s due to the fundamentals explained further below.

05/22/2008 Update: As this article has become far and away my most-read, and since oil is now cruising towards $140 a barrel, I thought an update was deserved. For those without the time to explore the links below, oil is rising for a simple reason: oil production has not risen significantly since 2005, while demand for oil worldwide continues to rise rapidly. The simple law of supply and demand is moving oil prices up, and no number of Congressional hearings will change that.

With news of crude oil prices topping $110/barrel today, it’s no surprise that the price of gasoline and oil are once again on people’s minds. As an introduction, here are a few links on the global transportation energy (oil) situation today, and on various risks that we might face in the future.

What is Peak Oil? – This Wikipedia article on peak oil outlines the notion that oil production must someday hit a peak, since oil is a finite resource drawn from Earth’s crust.

Export Land Model – Jeffrey Brown, an independent oil geologist, and others at The Oil Drum provide insight into the effects of a simultaneous plateau or drop in oil production coupled with rapidly rising oil consumption in oil exporting countries. The ELM is a simple model that graphically illustrates some of the forces driving energy prices rapidly higher.
Read the full entry (271 words) …

Gas Prices – and what ever happened to the gas guzzler tax?

Americans have been complaining about gas prices lately; recent polls have shown that high gas prices are their number one economic concern. Of course, high gas prices are driven by high oil prices, which are in turn driven by supply, demand, and a healthy premium to account for terrorism, hurricanes, and other delights. Demand has grown faster than supply lately, shrinking surplus capacity to a minimum. Many point outside our shores to emerging economies as the source of this growth. But no one likes to look inward, right?

Since the late 80’s, fuel economy in American consumer vehicles has decreased, while vehicle weight and performance have increased (the EIA has the details). Since American vehicles consume 20% of the world’s oil, our driving habits have a huge effect on oil prices. Since everyone seemed to want an SUV until recently, the increased demand eventually impacted gas prices. Another way to look at this: if average fuel economy got back to what we achieved in 1987, we would consume 2 million less barrels of oil per day, driving oil prices down significantly, and cutting our import requirements by 20%.

The federal government instituted a tax on inefficient vehicles – the “gas guzzler” tax – back in 1978. So why hasn’t it had any effect on the demand for inefficient vehicles? The gas guzzler tax doesn’t apply to trucks of any kind, so it doesn’t apply to SUVs and trucks even though they account for 54% of all US vehicle sales today! If you buy a Lamborghini, expect to pay up to $8000 in gas guzzler taxes; if you buy an 8000 pound Excursion, laugh at the other guy on your way out!

Extending the gas guzzler tax to apply equally across all vehicles would seem a logical start to encouraging conservation and decreasing oil dependency. Then again, I’m not aware of any lobbyists who get a paycheck for that, while I expect the auto industry has its forces lining up against this already…