How Gas Prices Affect the Economy

Skyrocketing prices of crude oil in the international market are causing the gas prices to fluctuate every other day, and these fluctuations in turn, are adversely affecting the economy as a whole. From a layman's point of view, higher gas prices means paying more at the gas station or paying more for commuting from home to workplace.

However, the effects of soaring gas prices go well beyond the simple practice of paying more for fueling your vehicle or commuting. In fact, the effects on the economy are much broader than what we can imagine.

The United States alone consumes 20 percent of the total oil produced; of which somewhere around one-third is used to fuel vehicles which are increasing by the day. Even though the country has its own strategic oil reserves, it does have to rely on imports from the members of Organization of Petroleum-Exporting Countries (OPEC) as well as Non-OPEC countries.

Gas prices in the United States are dependent on several factors; the price of crude oil in the international market and its demand and supply being the most important among them. Crude oil price has increased by a great extent over the last few years (with the price per barrel of crude oil fluctuating around $100 over the last few months), and that in turn, has resulted in an obvious rise in gas prices over the same period.

Gas prices and consumer's propensity to spend are inversely related to each other, with a rise in the cost of gas bringing down the consumer's discretionary spending and a fall adding to the same. Simply put, when the gas prices rise, we spend more on fueling our vehicles and commuting - and to make up for this additional expenditure, we cut down on other expenditures. Similarly, when gas prices fall, we save a significant bit on the new prices - and the same is eventually channelized towards other expenditures.

This in turn, means that people will not just drive less but also shop less when gas prices rise and more when gas prices fall, as a result of which the demand-supply balance will be hampered, thus bringing about a drastic change in the economic conditions of the country.

One may assume that the consumer will resort to online shopping instead of going all to the store to save expenditure on fuel, but that doesn't really hold ground if you take into consideration the fact that gas price rise can also cause the price of other goods and services to rise, and that includes the cost of shipping goods as well.

If gas prices continue to rise unabated, it can have ripple effect on other sectors of the economy - something which we got to see in 2011. The fact that soaring gas prices are coming heavy on the transport sector are becoming obvious by the day, and that even though the automobile industry is trying its best to stabilize the condition by introducing fuel-efficient cars, hybrid car models, etc.

Even businesses and educational institutes have had to bear the brunt of rising gas prices, with quite a few offices and educational institutes opting for a four-day week - instead of five-day week, to do their bit to limit the damage that is being caused to the economy. Experts are of the opinion that rising gas prices - though indirectly, are also affecting various other sectors - including the employment and tourism sector, negatively in these times of economic recovery.

Gas prices are quite volatile in nature, and therefore, it isn't quite surprising to see them shoot up at one point of time, only to come down drastically within a week.

It is important to understand how high or low gas prices affect the economy as our actions as consumers are directly dependent on how much we spend on gasoline, which forms an important part of our budget today.

At the same time, our expenditure on goods and services directly guides the economic conditions of the country, as well as the world as a whole, with demand-supply economics coming into the picture.