Monday, June 27, 2011

Gas Prices - a Vicious Circle?

Note: I rarely comment on economic or political stories.  With that in mind, I'll keep the firebrand in me at bay.

See this AP story for more background information:
Consumer spending is important because it accounts for 70 percent of economic activity. The spike in gas prices has forced many consumers to cut back on discretionary purchases, such as furniture and vacations, which help boost growth.
Before the "Big Recession of 2008", gas prices were spiking upward, causing me to sell my old Caprice and Mercury Mountaineer.  In the world of $3 gasoline, I was spending way to much money on keeping these V8 beasts fueled.  But with the financial shock, oil demand dropped like a rock, pushing gas prices down.  During this brief spell, I got to enjoy a 5.7L LT1 Buick Roadmaster even though I knew this gasoline respite would be temporary.

As the economy sluggishly improved earlier this year, gas prices once again started to rise.   Oil is not only energy to produce, it is also plastic material and fertilizer.  Increased demand in goods will also increase transportation needs which in turns ramps up the need for diesel for trucking and trains.  This increase is also passed along to food and material prices.  When our personal fuel prices go too high, we stop spending our hard-earned dollars on goods since that money is instead spent on energy.  However, when we reduce our non-energy spending, gas prices will drop with decreased consumer demand, once again allowing us to have more free money to spend.

Without cheap energy, the economy may be stuck in a sort of "Energy Vicious Circle," never allowing consumer demand to gain traction until something breaks the cycle.  What will that take?  That's a topic for another day.


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