When we compare today’s gas price of $3.382 per gallon to last year’s $3.868, we see a drop of $0.486, or about 12.6%. Even with this recent drop, gas prices are still unpredictable and have a big impact on the economy. Gasoline is essential not only for transportation but also for agriculture, industries, and businesses that rely heavily on fuel. Elevated USA gas prices drive up the cost of other necessities and impact both consumers and businesses.
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But why are gas prices going up, and how does it affect the economy? Let’s understand how US gas prices influence the economy and also examine their short-term and long-term effects.
Understanding Gas Prices
Understanding the dynamics of crude oil pricing is essential to grasp why gas prices fluctuate. Global oil prices are often benchmarked against specific types of crude oil, which are categorized based on their molecular properties and quality. These benchmark crudes serve as standard references for pricing worldwide. Some of the widely recognized benchmark crudes include Brent Crude, West Texas Intermediate (WTI), and Dubai Crude. By using these benchmarks, traders and analysts can compare and assess the value of different oil grades across various markets.
If we put a decade’s worth of U.S. gas price data on one page and analyze the changes, we come across some surprising results. In June 2014, prices were high at $3.695 per gallon. By February 2016, they had dropped to a record low of $1.767 per gallon due to a global oil oversupply and increased domestic production.
From 2017 to 2019, prices stabilized between $2.50 and $3.00 per gallon. The COVID-19 pandemic in 2020 caused a sharp drop, bringing prices to $1.876 per gallon in April. However, as the economy recovered, prices increased, reaching over $5.00 per gallon in June 2022 due to supply chain issues and geopolitical tensions.
By July 2024, prices had dropped to $3.622 per gallon. Although prices are coming down these days, it’s not necessarily a cause for celebration. The recent reductions might be due to subsidized prices linked to the election season, rather than a long-term trend.
Direct Impact on Consumers
Since early 2021, American families have felt their budgets tighten due to high gas prices. These rising fuel costs not only increase transportation expenses but also elevate the prices of essential goods. As gas prices hike, the cost of daily travel, including commuting and household expenses rises, leaving less money for groceries, utilities, and savings.
According to the Bureau of Transportation Statistics, the Consumer Price Index (CPI) for transportation costs rose from 193.4 in 2010 to 267 in 2023, a 38% increase. Private transportation costs increased by 0.4% from 2022 to 2023, after an immense 15.5% jump in 2022. In contrast, public transportation costs decreased by 3.5% from 2022 to 2023, after a 19.9% rise in 2022.
How US Gas Prices Affect Businesses
Gasoline prices are determined by the global oil market, which starts with crude oil production. In 2023, the U.S. led the world, pumping out 21.91 million barrels per day or 22% of the global trade. It highlights the vast amount of fuel consumed as the main energy source for many industries in the U.S. So when gas prices rise, businesses will ultimately feel the impact. Besides that, the government imposes regulations requiring the use of biofuels or diesel exhaust fluid (DEF) to control pollution. The higher cost of DEF also adds to fuel expenses for businesses.
Let’s discuss the businesses that face the impact of higher fuel prices:
● Freight and Logistics
Freight and logistics involve the large-scale transportation of goods, including shipping by truck, train, air, or sea. Rising fuel costs increase the expense of transporting goods and lower the profit margins for freight companies. To maintain their profitability, these companies raise freight charges and demand more money from consumers.
● Delivery Services
Delivery services handle the final step of getting goods to consumers, like delivering packages and food. Higher fuel prices raise the cost of these direct deliveries. This leads to increased fees for consumers or reduced profits for delivery companies.
● Construction
In the construction sector, high fuel prices impact machinery operation and material transport. As fuel costs rise, the expense of running heavy equipment and transporting construction materials increases. It results in higher project costs and possible delays in completing projects.
● Agriculture
In agriculture, high fuel prices increase the cost of running machinery and transporting crops. These higher expenses for farmers often result in increased food prices for consumers.
● Food Industry
Elevated fuel prices also increase transportation and delivery costs in the food sector. This leads to higher menu prices for consumers or reduced profit margins for businesses, as they try to cover the added expenses.
Why should gas prices be lowered? Lower gas prices benefit both producers and consumers. When fuel prices are high, they burden businesses and make goods and services more expensive for consumers. Businesses respond to rising gas costs by increasing the prices of goods and services or adding fuel surcharges. They may also cut back on hiring and operations, which can hurt growth and lead to unemployment.
So, what’s the solution to this unpredictable fluctuation in fuel prices? Businesses should focus on fuel efficiency to handle unpredictable fuel prices. By reducing operating costs and maintaining stable pricing, they can stay ahead even when gas prices fluctuate.
Broader Economic Effects
Gas prices have a huge impact on the U.S. economy. When fuel prices go up, they affect everything from how much people spend to how businesses operate. This impact reaches key areas like economic growth, inflation, and employment. Let’s discuss how gas prices affect the economy:
● Gross Domestic Product (GDP)
When gas prices increase, it costs more for businesses and consumers to operate. This means people spend less on other things, which can slow down the economy and GDP growth. Alternatively, when gas prices drop, it becomes cheaper to run businesses and households. As a result, spending increases, boosting GDP.
● Employment
Employment growth is an important sign of economic recovery. Rising gas prices can slow down this recovery by making businesses hesitant about hiring. For example, companies in the transportation sector might delay hiring or cut jobs due to high diesel fuel costs. This can lead to higher unemployment rates or stagnant wages, which can slow economic growth.
● Consumer Confidence
Higher gas prices can weaken consumer confidence. When fuel costs rise, people worry about the economy and start saving more while spending less. For example, if gas prices increase, consumers might cut back on dining out or vacations. Rising fuel prices also make transportation and logistics more expensive. As a result, the cost of products and services increases. Eventually, it lowers the consumers’ purchasing power and makes them feel less confident about their financial situation.
Government and Policy Responses
Government and policymakers in the U.S. respond to rising fuel prices by implementing different policies to lower elevated fuel costs.
● Monetary Policy
Central banks use monetary policy to keep inflation low and stable. The Federal Reserve adjusts interest rates in response to changes in gas prices to maintain economic stability. To counteract inflation caused by rising gasoline prices, the Federal Reserve raises interest rates. Higher rates reduce inflation by making borrowing more expensive, which slows down spending and investment.
● Fiscal Policy
The government might implement several fiscal policies to address rising gas prices. They could lower taxes on gasoline to reduce prices at the pump. They could also provide direct financial assistance to help consumers cope with higher fuel costs, or invest in alternative energy sources to reduce reliance on oil. Another successful approach is the gasoline tax holiday, where states temporarily suspend gas taxes.
The government once suspended Maryland’s gas tax for 30 days, costing the state around $100 million in lost tax revenue. As a result, Maryland was able to sell fuel at a comparatively lower rate during this period.
● Strategic Petroleum Reserve
The Strategic Petroleum Reserve (SPR) can also play a part in stabilizing fuel prices by releasing extra oil to the market when prices spike. In 2022, the U.S. government used the Strategic Petroleum Reserve to help lower high gas prices. The SPR is a large stockpile of oil that can be released to increase oil supply and stabilize prices during emergencies. Along with this, new public lands were leased for drilling to boost oil production.
Long-Term vs Short-Term Effects of Gas Price Changes
Gas price changes have different effects in the short term and long term.
● Short-term Effects
In the short term, the gasoline demand is relatively inelastic which means people don’t quickly reduce their consumption even if prices rise. This is because they need time to adjust their habits or find alternatives. In the short term—less than a year—the price elasticity of demand for gas is about -0.25. This indicates that if the price of gas increases by 10%, consumers will demand 2.5% less gas.
● Long-term Effects
In the long term, however, the impact of higher gas prices becomes more noticeable. People start changing their behaviors to cope with increased costs. The price elasticity of demand is around -0.6 in the long run which shows people are more likely to reduce their gas use when prices rise over time. For example, they might opt for more fuel-efficient vehicles, use public transportation more, or adopt alternative energy sources.
Moreover, In the long term gas price changes, businesses buying fuel in bulk might look for ways to secure lower rates or invest in energy-efficient equipment to manage the impact of changing bulk gas prices.
Stay Ahead of Gas Price Fluctuations with Fuel Logic
Gas prices affect the economy by changing transportation costs, influencing inflation, and altering how much people spend. They also increase business expenses and impact job creation. Understanding how gas prices impact the economy can help you manage finances more effectively and stay stable.
Gas prices also impact your budget and expenses, so keeping track of current rates is important. By checking “gas prices near me,” you can find the best local prices and make cost-effective choices for fueling your vehicle and equipment.
FAQs
● How much does gas contribute to the economy?
Gasoline is crucial to the economy. It powers most transportation and affects how goods and services move. The oil and gas industry supports 10.3 million U.S. jobs, making up nearly 8% of the nation’s GDP. It adds almost $820 billion to the economy. In 2023, U.S. refineries exported over 90 billion gallons of petroleum products to more than 100 countries. It makes the USA the largest exporter of petroleum goods worldwide.
● What affects gas prices in the USA?
Gas prices in the USA are primarily influenced by global crude oil costs, which make up about 50% of the price. Refining costs account for 25%, while distribution, marketing, and taxes cover the remaining 25%. These costs impact the retail prices that gas retailers and bulk fuel buyers pay. Retail stations also deal with local factors like store type, location, competition, and fuel delivery methods, which can further affect the price you pay at the pump.
● Why is fuel important in the economy?
Fuel is essential to our economy because it powers almost everything we do, from cooking and heating to transportation and manufacturing. In 2022, 66.6% of U.S. petroleum was used for transportation, and 27.5% for industrial purposes. These sectors rely on fuel to function. By keeping these industries running, fuel supports jobs and helps businesses make money.
● How does the US government control gas prices?
Market factors like global oil prices and demand are the core factors that impact gasoline prices. The U.S. government doesn’t directly control gas prices but influences them through policies and regulations. It sets taxes on gasoline, regulates oil drilling and refining, and can release oil from the Strategic Petroleum Reserve to increase supply.
Do you want to stay updated about fluctuating fuel prices in the US?
Fuel Logic is here at your service. We are ready to help with your fueling needs and address any issues about fuel expenses and on-site deliveries. We ensure your operations stay on track by delivering high-quality fuel directly to your location.
Whether you need mobile fuel delivery, bulk fuel delivery, off-road diesel, or DEF delivery, we have you covered across the US. Our customer support team is available 24/7 for fuel delivery inquiries. Don’t wait—contact Fuel Logic now to order fuel and stay updated on gas price trends.
