$4.00 Gas Prices Will Bring New Recession

by Sean Bryant on March 19, 2012

The single greatest factor that can kill the American economy at this moment is the price of gasoline. If we don’t solve it and solve it fast, the country is headed for another recession.

Consumer confidence, overall spending, and unemployment all hang on this one issue.

The national average continues to rise, passing $3.80 a gallon this morning.  Many experts believe the price of gas nationwide will exceed $4.00 by Memorial Day, and could reach $5.00 by the end of the year.

For consumers this problem extends way beyond just the cost of filling the gas tank. For starters, when gas prices increase, so does the price of everything else.

Then there is the “uncertainty factor”. When people get nervous about their finances, consumer confidence goes down. They stop spending. When companies are faced with lower sales because people aren’t spending, and higher costs because of gas prices, they start cutting back. Now people’s jobs are in jeopardy, so they spend even less. And the downward spiral towards recession picks up speed.

History Will Repeat Itself

According to the Motor and Equipment Manufacturer’s Association, Americans drive 3 trillion miles each year.  In other words, we are heavily impacted by gas prices.

Let’s look at what happened in 2008: Gas prices rose steadily in 2007 and 2008, eventually hitting $4.10 a gallon. This forced the average family to shell out an extra $260 per month, just to fill their tank.  To make matters worse, higher fuel prices brought on higher food prices, roughly $80-100 per month for the average family.  Altogether, that’s an extra $340-$360 per month in bills. This tipped the scales the wrong way.

It was the breaking point for most families who were just making ends meet and was a big factor in why people couldn’t pay their monthly mortgage payments. This led to 3.16 million foreclosures in 2008 compared to 847,000 in 2005.

In 2008 in an attempt to stimulate the economy, the government issued checks to everyone 18 and over. The checks ranged from $250 – $600, but this didn’t do much good because most of this money was eaten up by the higher cost of gas and food.

Had gas prices been kept in check, it would have been the equivalent of people having a monthly stimulus check- every month.

If nationwide gas prices do break the $4.00 mark, it’s going to be a lot worse this time around and most probably the breaking point for many people.  The difference is this time, not only will the people who haven’t recovered from the last recession falter further, but the ones who barely just hung on last time will fall.

Unemployment Will Rise

Although the unemployment rate has been improving and now stands at 8.3%, we will see a reversing of this trend with gas prices at $4.00.  Companies will have to cut costs again, and the first thing to go is jobs.  Unemployment would more than likely skyrocket to new proportions. It won’t be a slow increase either, like when unemployment goes down. Companies don’t cut gradually. They cut thousands at a time when they are desperately trying to shed expenses.

All it will take is one to two quarters of higher costs and the labor cuts will start.

Keep the Money In the Country and Flowing

In 2008 alone, just with what was paid extra at the gas pump, the U.S. economy lost over $286 billion dollars. Almost exactly half of that money was paid directly to overseas companies, therefore permanently sucking $143 billion dollars right out of the U.S. economy. The other half went to a few select companies in the United States.

Our ten year cost of not managing oil prices has cost the U.S. economy $1.7 trillion dollars. Again, almost exactly half of that, going directly to overseas oil companies.  When huge numbers of dollars are going overseas it weakens our economy.  It’s the local flow of money that keeps restaurants, shops, developers, and other businesses going.

All those billions lost overseas are gone forever. There is no ripple effect as there would be if that money was then re-spent within the U.S.

Money that stays in the country builds the economy. Money that leaves, is just gone.

The Future

What’s the answer and how do we fix the problem?  For starters, the price of gas is in large part driven by oil speculators, not supply and demand.  Gas went from more than $4.00 per gallon in 2008 to an average of $2.35 in 2009. That’s speculative movement, not supply and demand movement. Put a clamp on speculation.

Next, the candidates running for office of President of The United States need to outline and implement a successful energy plan. Without it, the economy is going to remain stagnant. Or worse, we’ll be constantly poised to crash at the whim of those controlling oil prices.  The big question: how do we get gasoline prices down to $1.20 per gallon again?  In fact, this is about where the price was for 20 years leading up to 2000.

Secretary of State Hilary Clinton said it would cost the United States roughly $120 billion to get off our dependence on foreign oil. Well, we allowed $143 billion in 2008 to go directly to overseas oil companies. We also spent far more than that on the ongoing Iraq and Afghanistan conflicts. Neither of which has left a positive impact on the U.S. economy.

The point is, we are spending the money already. Let’s spend it in a way that positions us for success going forward.

Solving the energy crisis would be a double kick start for the economy.  If gas prices were reduced down to the $1.20 level and maintained there, it would keep the price of everything else down and keep the employment rate holding steady.  People would have more money to spend, and they would spend it in ways that ripple through local businesses.

It would also go a long way toward keeping consumer confidence positive, which directly impacts overall spending, which directly impacts the health of the economy.

When President Kennedy told Congress in 1960 that the U.S. would put a man on the moon by 1969 it was an incredibly audacious goal. We had never launched anything into orbit even. Computers had nowhere near the processing power they do now, communications equipment was nothing like today…yet we succeeded. President Kennedy and the members of congress laid out a plan, executed the plan, and accomplished the seemingly impossible, in just nine years.

The same needs to happen with the energy crisis.  A leader needs to emerge, outline where we are and where we are going, and then lead the country to it. Without that, we could eventually be looking at gas prices at more than $10 per gallon, just like parts of Europe are seeing now.

That would be a permanent stake in the heart of the U.S. economy.

John P. Strelecky is the #1 Bestselling author of the leadership book The Big Five for Life. His works have been translated into twenty-one languages and sold in over forty countries. He has been honored alongside Stephen R. Covey, Tom Peters and Ken Blanchard as one of the one hundred most inspirational thought leaders in the field of leadership and personal development. John has served as a strategic advisor for companies and government organizations around the world. His expertise is iterations—how one event impacts another. His thought provoking perspectives on the way these iterations impact leadership and current events are regularly sourced by media outlets in the U.S. and abroad. When he is not writing, speaking, or consulting, John is out seeing the world. He has backpacked through Africa, the Amazon, Peru, S.E. Asia, China, much of Central America and traveled extensively in Europe.

Visit http://www.bigfiveforlife.com/

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.

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