Photo: Flickr – Kansas Poetry
Gas prices have been steadily increasing at the pump, with Americans spending perhaps $41 billion more this year if the recent $0.29 increase remains. But Joseph LaVorgna, Chief Economist at Deutsche Bank, thinks the surge may not become the headwinds to economic performance that it has been in recent years.
“At the moment, we believe the economy can withstand the recent increase in oil prices, provided that they do not increase substantially further and remain at elevated levels on a longer-term basis,” LaVorgna says. “In our view, it is both the magnitude and persistence of oil price changes that matter. Importantly, there is some offset coming from lower natural gas prices and reduced utilities consumption, owing to an unseasonably warm winter.”
According to Deutsche Bank, average gas prices hit $4.02 in May of 2011, before retreating to a low of $3.29 in December. Today prices averaged $3.58.
Avery Ash, a manager at AAA who covers the Fuel Gauge Report, notes there have been vastly different price movements across the country.
“Areas in the centre of the country that use gasoline from refineries with access to the relatively cheaper crude products have seen prices hold steady or even move lower in recent weeks, while areas having to rely on refiners using more expensive products have seen prices move higher,” Ash says.
Over the last month, prices have fallen in one of every 10 states, including Ohio and Michigan. The vast majority of the country, however, has seen prices tick up — with most regular unleaded gasoline prices up at least a dime month-on-month in February. Texas was one of the hardest hit states, with prices up $0.21 over the period.
Republicans have recently seized upon this issue in their attack on President Obama. A cover story in The New York Times this Sunday by Michael Shear reported that Speak John Boehner was pushing the party embrace consumer anger at the pump.
But it may be difficult for the GOP to tap this pump zeitgeist if the economy continues to add jobs at the rate it has. At the same time, with initial claims continuing to fall, 2012 looks substantially different than 2011 or 2010.
LaVorgna says that a breaking point would occur at $4 per gallon, a psychological barrier for consumers. However in the past, when the $4 level was broken, prices retreated relatively rapidly.
“Our baseline scenario does not anticipate prices rising to such high levels at present,” he says. “There is another factor to consider, as well, which is the Fed. If energy prices rise, monetary policy in inflation-adjusted terms actually becomes easier. Moreover, we think it could make cash-rich companies more likely to spend on plant and equipment as well as hire workers.”
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