Stimulus at the Pump

August 1, 2014

Iraq is one of the world’s largest oil producers, so when the ISIS militants rolled in from Syria and took over Iraq’s largest oil refinery, global oil traders and gas companies braced for a sharp spike in prices. Consumers expected to see higher prices at the pump in short order.

Instead, oil and gasoline prices are right where they were a year ago. As you can see from the chart (Figure 1), “regular” grade gasoline prices in different parts of the U.S. fell during the winter and have risen again in the summer months. If you happen to live on the West Coast and suspected that you paid more for gas than the rest of the country, well, this chart confirms it; the prices in California and the West Coast are generally more than 50 cents a gallon higher than the cost at the pump along the Gulf Coast, where the U.S. has the bulk of its refineries. People in the Northeast, Mid-Atlantic, and Southern states typically fi ll up their tanks at cheaper prices.

If you want a longer-term view, look at the second chart (Figure 2), which shows the cost of “regular” grade gasoline since 1990. It shows prices hovering around a dollar a gallon for most of the 1990s. (The good old days!) Since then, the price has gradually crept upwards with greater volatility and a deep price drop during the Great Recession.

Figure 1                                                                           Figure 2
Regular Gasoline Prices in Dollars per Gallon Worldwide from July 2013 to July 2014Regular Gasoline Prices in Dollars per Gallon in the United States from Jan 1991 to Jan 2013

Since the beginning of this decade, prices have remained fairly level, and indeed today’s gasoline prices are almost exactly what they were in early 2008. Prices have held steady despite the turmoil in the Middle East, in part because most of the Iraqi oil fi elds are located in the southern part of the country, a safe distance (so far) from the ISIS insurgency. Add to that a recent agreement in Libya between the central government and a regional militia that will add 150,000 barrels a day to that country’s crude oil exports. Another factor that has helped keep oil prices in check is the dramatic increase in U.S. oil production over the past three years which is adding to the overall supply and is helping the U.S. move toward energy independence.

The moderation in prices, from $4.00 at the pump two years ago to roughly $3.60 today, is acting as a kind of stealth stimulus for the U.S. economy. U.S. drivers are expected to use roughly 133 billion gallons of gasoline this year, so the price break adds $53 billion of savings to peoples’ balance sheets. This, added to the lower costs for factories, airlines, and electric power plants, could add half a percentage point to U.S. economic growth in 2014.

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