We might deny it.. We might diminish its importance.. We might not like it..
But the fact is that gas prices are intrinsically correlated with the overall economy in the U.S. and have been for decades. Oil gluts and crises have correlated with economic prosperity and recessions, especially when looking through the lens of inflation.
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Bad Prices Arising
The most famous and impacting shock to the oil economy that’s often spoken about is the energy crisis of the 1970s. OAPEC (the Organization of Arab Petroleum-Exporting Countries) shattered policy-makers’ assumptions about their reliance on American trade, and prices shot up from $3 to $12 per barrel. For the average American, drivers went from paying $0.36 per gallon at the pump in 1970 (which is equal to about $1.72 per gallon in today’s dollars) to $1.19 per gallon in 1980 (which is equivalent to about $2.95 per gallon).
In the late ’70s and early ’80s, there was a massive global recession. Unemployment spiked to 9% from 5.1% in 1975. In 1982, it reached its peak at 10.8%, the highest since the Great Depression. Banks and loan companies struggled to get a handle back on the economy. “Reagan’s Recession” also affected other countries, like Japan, which suffered a great deal during that time and famously suffered a huge homelessness problem.
Bad Times Today
The worst gas prices in U.S. history came only a few years ago, topping out at $3.64 per gallon in 2012 (equivalent to $3.80 per gallon today).
However, let’s not forget the very intense and rapid price increase preceding the 2009 recession. Even our most chaotic price jumps from past decades pale in comparison to the insane jumps from 2002 to 2008, when gas prices climbed steadily and dramatically until the recession. While Lehman Brothers and the housing market crash were much to blame for the collapse, the spike in gas prices didn’t help. Bread and milk experienced sharp increases in price, meaning that it was harder to feed children, who were already in a desperate situation.
In 2008, the unemployment rate jumped up to 10%, almost as high as in the 1980s. The global Great Recession nearly caused the collapse of countries and almost spiraled into a massive global depression, which would’ve been much worse considering how closely world economies are now linked.
Earthquakes and Lightning
What’s important to remember is that every time there is a sharp increase in oil prices, it also affects people’s lives. High oil prices have a negative impact on retailers, the auto industry, public transportation, grocers, employees’ raises, new jobs, unemployment, and the economy overall. High oil prices cause chaos.
But why didn’t the situation keep spiraling in 2012, when oil prices shot higher than literally ever before in the U.S.?
It’s hard to say, but there are things that are different now. For instance, less than 10% of our oil comes from the Middle East today. We still depend a great deal on foreign oil every day, but now, our cars are more fuel-efficient. The current goal is to reach 54.5 mpg as a target fuel economy for vehicles by 2025. Hopefully, all of this will make us less dependent on oil, so that price variations won’t cause major global collapses as in 1980 and 2008.
Trouble On the Way
Are we breaking the ties of oil prices on the U.S economy? We’re not out of the woods yet.
Those two tumultuous decades should’ve reformed the car and energy industries. And they have, but not quickly enough, and not in the ways we’d like.
As we neared an economic crisis in 2009, oil companies wisely scrambled for new places to find cheap gas. Rather than finding new energy sources, we’ve been getting more oil locally (which is in limited supply — think about the Dakota Access Pipeline). The focus turned to natural gas, another limited energy source. We bailed out the car companies that had been slow to adapt and create alternative-fuel engines. Legislation tends to be rougher on newcomers like Tesla. And renewable energy companies have been having a hard time getting funding.
Now, oil prices have gone down, but instead of experiencing a sudden economic boom, we’ve seen slow growth. This has many economists concerned for a number of reasons.
Have we taken this time to catch our breaths and move away from oil, or are we still shackled to it?
Some experts wonder whether or not cheaper oil is affecting this current economic climate at all. (Note that this may be because shell-shocked 2009 survivors were a bit slow to increase their personal spending.)
Maybe the economists think there’s a bad moon on the rise.