The Japanese earthquake has taken the chance that we will be paying $5.00 a gallon gas by summer down from a good to nearly zero. That’s not to say that the US will avoid an economic impact from the Japan quake. Investors all of a sudden do seem spooked about Japan. US stocks opened down 300 points on Tuesday. But the hit we take won’t be from oil.
Here’s how the wacky, unfortunate calculus of an American economy hooked on oil works out: Senseless human-inflicted tragedy in the Middle East equals higher gas prices and economic trouble. Natural disaster in Asia that ended well over 10,000 lives, well that could put the US recovery right back on track. (More from TIME.com: The Seven Ways you Can Help Victims)
For the past month or so, economists have grown increasingly worried that rising oil prices, in part driven by unrest in the Middle East, could halt the US economy’s recovery. Some economists were predicting that a rise in gas prices could lower employment in the US by as many as 600,000 jobs. In fact, oil was quickly becoming one of the biggest economic fears. A recent poll of economists by the Wall Street Journal found that a number of the forecasters had upped their odds that the US could dip back into recession. The biggest reason given: Rising gas prices.
That was until the Japanese earthquake. On Monday, oil fell below $100 a barrel in the US for the first time since the beginning of the month. And Japan’s economic outlook seemed to worsen on Tuesday, when Japanese stocks plunged another 10%. Now oil analysts who had predicted a smooth ride up for oil prices through the summer are saying that crude prices, at least for now, may be as high as it will go. The price you pay at the pump might even drop come summer time. Here’s why:
Japan is a net importer of oil. It is one of the world’s largest. The world’s third largest economy has almost no natural oil. Yet it is the third largest consumer of oil, using nearly 4.5 millions of barrels of oil a day. China consumer nearly double the oil that Japan does, but about half of that supply it gets from internal drilling operations. It’s not clear how much the earthquake could slow the Japanese economy, but you can expect there to be considerable less used of cars and trucks in the northern part of the country where roads and ports are destroyed and factories are shut down. The area directly affect by the quakes accounts for anywhere, depending on who is being quoted, from 3% to 7% of Japan’s economic outlook in good times. Add in the ripple effects in the rest of the country, you can easily get to a drop of 10% in economic activity at least for now. That’s an extra 450,000 barrels of oil a day of supply that is free on the market for some other country, or numerous countries, to use. The people of Finland for instance consume just 225,000 barrels of oil a day. Hungary another 170,000.
The point is, for now, all that extra supply means that the price of crude oil will drop, and already has. Does that mean you will soon be paying less at the pump? Not immediately. Gas prices are what economics call asymmetric – that means they rise quickly when crude prices are rising, but are sticky on the way down and take a while to fall. That means gas prices won’t fall immediately. But they probably won’t rise much from here either.
The fact of the matter is that what was driving gas prices higher was not only unrest in the Middles East. The real driving force was rising demand in Asia, of which a recovery in Japan was adding to the upward pressure. Now that pressure that could push gas prices to $5.00 by labor day probably isn’t there anymore.
Yes, many are saying that the Japanese earthquake could eventually in a few months actually increase overall demand for oil. That’s because in order to replace all of the nuclear reactors it has lost Japan may have to switch for a little while to creating more of its energy by burning oil. It’s not clear that will push oil prices higher. Japan has relatively few oil burning power plants – most are natural gas, coal and yes nuclear. And the type of oil that you do burn for power generation is heating oil and diesel, and won’t necessarily increase demand for gasoline.
But even if it does, by the time that happens we will be out of the crucial summer months when the pressure on gas prices in the US is the highest. We will also be six months further into the recovery. And hopefully by then, the chance that higher oil prices could send us back into recession will likely be close to zero.