In 2011 Americans consumed 8.75 million barrels of gas per day. There are 42 gallons in a barrel. That’s around 135 billion gallons of gas consumed per year. A $1 move in the price of a barrel of oil translates to about a 2.5 cent increase in a gallon of gas (see link above). 2.5 cents times 135 billion gallons of gas equates to about $3.4 billion. A $10 move in oil prices is a $0.25 markup on a gallon of gas is about $34 billion out of the economy. Allowing for some rounding errors that’s about 1/4 of 1% of the economy. That doesn’t sound like a lot, but that’s mathematically enough to cause a recession.
This is what people are talking about when they say we’re addicted to oil. If the price of oil were to go up $10, it could potentially cause a recession by itself. Of course, $34 billion doesn’t just disappear from the economy so it’s really not that simple. Assuming no reduction in driving, that money does filter through the system after some oil companies take a cut. But people won’t have as much money to spend on other goods. And since we import a significant portion of our oil, some of that money leaves the country. The bottom line is high oil prices are not good for the economy. This is well known.
But the math we walked through above isn’t always so apparent. And the insensitivity to gas prices I assumed is a crock. We’re very sensitive to gas prices. So what really happens when gas prices go up?
Let’s look at a typical Saturday afternoon trip for a mother and daughter. On the weekend they like to go to the mall and window shop. Occasionally buying something but it’s mostly just about the shopping experience. They do drop $10 at Starbucks though and spend just as much in gas getting to and from the mall. When the price of gas goes up they decide to not bother with that trip and do something that doesn’t require driving instead. Not only are they cutting back on vehicle expenses, they cut back on spending too since they don’t make it to Starbucks.
This is because consumers know that rising gas prices are going to hit them everywhere. Food prices go up, plane tickets, shipping costs, commuting costs, everything. So they further cut back spending. Maybe Dad works from home one day a week saving a few bucks on gas and parking. Money not spent means money not moving around in the economy. The spending spiral continues.
Economists try to measure the impact of one dollar on the economy but it’s difficult because that dollar will get spent multiple times in a year. But cutting back spending by a dollar usually means more than a dollar lost from the economy.
Americans have a weird relationship with their vehicles. Improved fuel efficiency usually means we think we can drive further. That’s not really helping with reduction in demand. We need to be living closer to the places we’re going. The girl commuting with the Prius has nothing on the guy who rides his bike to work.
Getting off our addiction to “foreign” oil won’t matter either. This is a global world, it doesn’t matter where the oil comes from. As long as we insist on transporting ourselves around in machines with internal combustion engines the math is never going to be in our favor.
The link at the top of this post has a lot more about our gasoline usage and has some more interesting math.