Will High Gasoline Prices Lead to Recession?

Chart of the Week: Will High Gasoline Prices Lead to Recession?

March 14, 2022

As was drilled into me in Econ 101, two factors drive prices—supply and demand. The past two years have certainly provided professors of the dismal science ample real-world examples we can all relate to—particularly at the gas pump.

If demand dries up, then prices fall. During the initial COVID-19 economic lockdown in the spring of 2020, demand came to a screeching halt. Working from home meant less driving; a lot less. So it was no surprise to see gasoline prices fall to around $2 per gallon—the lowest level since the global financial crisis in 2008.

Lately we’ve seen the flip side of that coin. More people are commuting again, but many who have a public transit option are still using their cars instead. And of course, Russia’s invasion of Ukraine has disrupted the supply of oil—in a big way. With demand rising and supply constrained, prices are spiking—last week the average cost of gas in the U.S. clocked in at a record $4.20 per gallon and in California, where gas taxes are particularly high, a gallon of gas is over $6.

High gas prices raise the risk of a recession—when you pay more at the pump, you have less to spend elsewhere. But it’s not a given. And while gas prices may continue to rise from here—you can’t just flip a switch to produce more oil and gas—the cure for high gas prices is high gas prices. Should commuters begin to see the benefits, again, of either working from home or riding buses and trains, demand could quickly decline, once again proving the point my economics teachers made so many years ago.

Note: Chart shows average cost per gallon of gas in the U.S. on a quarterly basis from 12/31/93 through 3/7/22.
Source: U.S. Energy Information Administration.

 


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