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Limited Gas Pains: Why the U.S. is Better Able to Handle Higher Gas Prices

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As the price of gasoline continues to rise — yesterday, I paid a painful $4.25 per gallon — concerns are rising over the potential impact of expensive fuel on the overall economy. But, as Aaron Task and I discuss in the accompanying video, the U.S. economy is better situated to handle higher gas prices than it was last year, four years ago, or ten years ago. The upshot: higher gas prices are going to hurt, and will be painful for many. But they won't torpedo the economy.

For a host of reasons, the world's largest consumer of gasoline is much less likely to be the victim of high gas prices than it was a few years ago. Here's why.

First, compared with 2007 and 2008, corporate and personal balance sheets are in much better shape, and hence better able to absorb rising costs.

Second, the U.S. is a bigger producer of oil than it was a few years ago. Oil consumption is in many ways a zero-sum game: more money spent by consumers on gasoline means more money going into the pockets of oil producers — most of them overseas. But in the last few years, the U.S. domestic oil industry has experienced significant growth, thanks in part to North Dakota's shale oil boom. Government data on crude oil production suggests that 2011 saw the highest level of domestic oil production since 2003. So more of the money spent on more expensive oil will stay in the U.S.

Third, Americans simply drive less, and use less gas, than they used to. Part of that can be ascribed to the fact that employment remains far below the 2007 peak. But on the aggregate, the U.S. economy has figured out how to move more good and people around while driving fewer miles and using less gas. The volume of crude products supplied in the U.S. peaked in 2005 at 7.59 billion barrels, and fell dramatically to 6.85 billion in 2009, and then rose to 7 billion in 2010. That's less than the amount used in 2001. The figure was down again through the first 11 months of 2011, even though the economy and employment were growing.

What happened? In the last few years, the corporate sector got religion about efficiency. Walmart has steadily increased the fuel efficiency of its vast trucking fleet. Through the use of smart logistics and route planning, UPS has shown it can significantly increase the number of packages it delivers even as its trucks drive fewer miles. Businesses that have to spend the most money on gas have the biggest incentive work on efficiency. And so they're investing in alternative fuels and new technologies. The other day in New York, I saw several electric DHL trucks, part of its fleet of 30 battery-powered vans and 50 hybrid trucks. About 30 percent of the taxis in New York City today are hybrids. Bus fleets around the country run on compressed natural gas, as the website CNGNow.com documents.

Fourth, manufacturers have changed their product offerings. Every year, every month, every week, a portion of the massive U.S. car fleet turns over. And thanks to advances and innovations by manufacturers, consumers generally are generally upgrading their mileage when they buy or lease new cars. Hybridcars.com chronicles the continual rollout of new hybrid, electric, and clean diesel models. As its sales dashboard shows, such vehicles account for only a small portion of monthly sales. But the market pressure and the technology created by hybrid development is influencing traditional vehicles. Thanks to consumer pull, government push, and smart engineering, the typical internal combustion engine produced today is significantly more efficient than the one produced a few years ago. For example, GM has now made eAssist standard in its Buick LaCrosse, which boosts its energy efficiency by about 30 percent (city) and 20 percent (highway). The Ford Focus gets 40 miles per gallon, and the company announced earlier this week that sales in February were likely to surpass 20,000, double the amount from February 2011. Chrysler boasts that it has 13 cars in its portfolio that get more than 25 miles per gallon on the highway. Cars sold in 2011 got an average of 33.9 miles per gallon compared with 31.2 in 2007 and 29 in 2002.

Fifth, more people have alternatives to driving than did four years ago. When gas prices rise, ridership of mass transit usually rises in its traditional strongholds like New York, Washington, and Boston. But in the last several years, light rail systems have opened and expanded in many states. And that means more people around the country have alternatives to driving. Phoenix's light rail system, which didn't exist in 2007, carries more than one million passengers per month. Seattle opened its light rail system in the summer of 2009. A light rail system in Hampton Roads, Virginia, went into operation last fall.

This is not to say that rising gas prices won't pinch the budgets of many Americans, or that they won't filter into the economy via higher prices for services and fuel surcharges. They will. But given the changing shape of the U.S. economy over the last several years, the damage is likely to be less severe.

Daniel Gross is economics editor at Yahoo! Finance

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com

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