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$4 gasoline isn't a big threat to the economy

As the top two charts show, oil and gasoline prices are very close to all-time highs. Arab Light crude is closing in on $120/bbl, driven by increasing mideast tensions, and that's only $26 off its all-time high of mid-2008. As the bottom chart shows, the nationwide average price of regular gasoline is now over $3.50/gallon, and it could be headed once again to its all-time high of $4.00. (Here in So. California, we're already paying over $4/gallon at most stations, and I've seen prices as high as $4.50.) Gasoline prices at the pump are just following the pattern of crude oil and wholesale gasoline prices.

Do rising oil and gasoline prices pose a threat to the economy? I know it's painful for many folks to have to shell out upwards of $100 to fill up the tank, but I doubt this will bring the economy to its knees.

This next chart is one reason why $4 gasoline is not a big threat. Thanks to conservation and technology, the U.S. economy today requires less than half as much oil to generate a unit of output than it did in the 1970s.

Despite the fact that the U.S. economy has more than doubled in size since 1979, our oil consumption has hardly risen at all. Cars are much more efficient these days, and more and more of our economy gets transacted through the internet, where marginal costs are almost nil.

As this chart shows, the average consumer today spends only about 6% of his income on energy (most of which comes from petroleum products), and that is almost 30% less than what he spent at the end of 1983, when the economy had just finished its first of what would prove to be seven years of very rapid growth and oil was very close to its (then) all-time highs. Simply put, we use a lot less energy today to power our economy, so the fact that energy is relatively expensive is much less important. (Actually, it's because energy is so expensive that we use a lot less of it.)

Meanwhile, plunging natural gas prices (thanks to new drilling technologies) help take the sting out of rising crude oil prices.

So, even though gasoline pump prices are making headlines and causing much irritation among consumers, there is little reason to think that this puts the economy at risk.

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