Gas Price Spike: A Long-term Job-Killer?

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Sky high gas prices, and worry, are back (Lucy Nicholson/Reuters)

The recent spike in gas prices is getting some economists nervous. Higher gas prices, it seems, could mean fewer jobs.

In the past two weeks, the price of gas has risen on average across the country $0.33 a gallon to $3.50. In many places in the country, the price at the pump is over $4.00. University of Maryland economics professor Peter Morici recently said that quick run up in gas prices might cost the economy 600,000 jobs. Economic forecasting firm IHS Global Insights has crunched the numbers on how rising gas prices affect the job market and they come to nearly the same 600,000 job conclusion. IHS, though, says the job loss could be more gradual, happening over two years, not one. The point is the same: Even after the Prius and 40 years of conservation efforts starting in the 1970s, it appears the US economy continues to be particularly vulnerable to oil price spikes. Here’s why: For a number of years now, the prevailing thought in the economics world is that oil and gas prices don’t matter as much as they once did to the U.S. economy. Cars are more efficient than they used to be. We manufacture a lot less in the US, and oil is not as much as a factor in a service economy. Inflation has essentially been tamed.

So when oil prices began to rise recently, a number of economists didn’t see a problem. Most people see oil as an inflation concern, and it is afterall what we associate with the 1970s: high gas prices and high inflation. But with prices for most everything else (minus oil and raw materials) barely rising, inflation didn’t seem to be a concern. In fact, the Federal Reserve is actually concerned that we don’t have enough inflation, not too much. Then there’s the fact that we are driving hybrids and other more fuel efficient cars these days. Even our SUVs get better gas mileage than many of the cars we drove back in the 1970s and 1980s. So I wrote last week a post that said oil was not likely to stall the recovery. Some economists said they would be worried if oil got to around $130 a barrel, but at $105 for US oil, we are still in the clear.

Turns out, if you look beyond inflation, there is a compelling case to be made that higher gas prices, even by as much as a quarter, could drag down the economy. Despite all of the reasons I gave above, the economy, it appears, is no less dependent on oil today than it was 40 years ago. At least that was the conclusion of a study done mid-last year by Valerie Ramey, professor of economics at the University of California, San Diego and Federal Reserve economist Daniel Vine. The two economists found the same drag on the economy from the rise in gas prices in the 1970s as the rise in gas prices in the mid to late 2000s, when oil hit a high of $150 a barrel in 2008. How can that be? Well, while we do drive more efficient cars, we drive them further than we used to. The rise of exurbs and the two-income household has dramatically increased commutes, and the number of miles we all drive. The result is that we haven’t got that much of an economic benefit from more fuel-efficient cars. And while manufacturing employs significantly fewer people in the US than it used to, it is still a large part of our economic output, some 30%. So the rising price of oil is felt there too. Then you have to factor in the fact that all those goods have to make it here from China. Some of that journey is by boat, but trucks are involved as well.

So how does that translate into job loss. Higher gas prices means we have less money to spend on other goods. And being that we are in a consumer driven (no pun intended) economy, that’s bad. And it doesn’t have to be a big run up to change our behavior. Chris Christopher, an economist at IHS, figures that for every $0.24 increase in the price of gasoline, employment is lower by 410,000. The recent two-week run up in gas, which was the second fastest two-week jump on record, has been $0.33 a gallon. That translates into 560,000 fewer jobs. “When the price of gas goes up, consumer confidence can take a big hit,” says Christopher.

There are, of course, caveats. Christopher’s job loss estimate is based on gas prices remaining on average $0.24 a gallon higher for at least two years. That usually doesn’t happen. Usually prices spike up in summer months and then fall back. But prices do seem to be rising earlier than normal. And given that the economy is still relatively weak, it is surprising that we are seeing $4.00 a gallon gas again so fast. What’s more, it doesn’t mean that employment will drop by nearly 600,000 jobs. In fact, with the economic recovery it is almost assured that the number of jobs will increase no matter what happens to gas prices. They just might not increase as much as they would if we were paying $1.50 at the pump.