What Happens When Gas Hits Four Bucks a Gallon in the USA?

We have seen this movie before.

When Ford announced that it was getting out of the car business in North America, I concluded that it might be short-sighted: "Gas prices can increase because of disruption in the Middle East, economic crashes or a change in government to one that imposes tough fuel economy standards. With what's happening in the States now, it could be all three. Demand for little fuel-efficient cars could come back with a bang."

So here we are, just two weeks later. Trump has pulled out of the Iran deal and the Middle East is blowing up; oil is up to seventy bucks a barrel and gas is following it, climbing toward $3 per gallon. (It is already hitting $4 in California.) Stephanie Yang and Alison Sider of the Wall Street Journal note:

Economic growth has boosted demand for oil. If that growth continues, most consumers should be able to afford to pay more to fill up their tanks. But conflicts in oil-producing regions could mean even higher gas prices, posing a threat to U.S. growth as the cost of fuel and gasoline weighs on drivers, airlines, delivery companies and other big consumers.

© Gas Buddy

Much depends on how high the price of gas goes and how long it stays there.

“Three dollars is like a small fence. You can get through it, you can get over it,” said Patrick DeHaan, petroleum analyst at GasBuddy, a fuel-tracking app. “But $4 is like the electric fence in Jurassic Park. There’s no getting over that.”

Things are very different from the last time gas prices were this high; thanks to fracking, the USA could increase supply pretty quickly, and there is far less dependence on foreign supplies. But the price of oil is still set on the world stage, not at home.

And people are beginning to worry. One car salesman said customers are asking more about electric cars. “It’s more in the consumer’s mind as to what the most efficient vehicle is.”

New Chevy ad/Promo image

Ford and the other manufacturers who have had such a good run with pickups and SUVs might suddenly find themselves wishing that they still had a lot of little fuel efficient cars on their lots. It certainly will give a boost to electric cars, and also to transit; the last time gas prices went up above $4 per gallon, we noted a study by Bradley Lane of the University of Texas, that Eric Jaffe wrote about in the Atlantic:

Lane found a pretty strong link between changes in gas prices and shifts in transit ridership. Every 10 percent increase in fuel costs led to an increase in bus ridership of up to 4 percent, and a spike in rail travel of up to 8 percent. These results suggest a "significant untapped potential" for transit ridership, Lane reports in an upcoming issue of the Journal of Transport Geography. In other words, a significant part of America's love for the automobile may only be its desire for inexpensive transportation.

Old Chevy ad/Promo image

It will be interesting to see where this ends; The Wall Street Journal writers note that "rising fuel costs can feed inflation and pressure interest rates" and post risks to the economy. But based on the last few cycles, who knows what might happen, including:

• Smaller cars may make a comeback
• Sales of SUVs and pickups plunge
• Electric cars get a boost
• Use of transit increases
• Suburban house prices decline relative to housing closer to work
• More people ride bikes
• The electric bike boom continues

Somehow, it is hard for me to be upset about this.