By Rebecca Leber
Gasoline is the only product in modern-day America whose price is listed on giant signs almost everywhere you go. Most people, even if they don’t drive, probably have a pretty good sense of what gas costs — currently averaging $5 a gallon nationwide.
The ubiquity and visibility of gas prices make them an easy shorthand for the rest of the economy, especially when they’re going up. And they often drive how people are generally feeling about the state of the economy and politics.
But gas prices aren’t really the best metric for understanding the broader economy. They’re very good for understanding the state of oil and refining but reveal less than you might think about the real-world impact on people’s lives.
There is a better, less alarmist measurement for understanding what’s happening to gas prices — one that shows that, even as gas prices near record highs, most households are still better off than they were in 2008.
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Oil supply doesn’t work as simply as turning on a faucet, and the president doesn’t even control the tap. “In the US right now, the constraints are within the industry itself, and have very little to do with any policies from the federal government,” said Sam Ori, executive director of the Energy Policy Institute at the University of Chicago.
Instead, oil companies have been “very reluctant to plow any of that revenue into capital investment for new wells,” Ori added.
Oil companies are having other issues, too, such as accessing the labor and materials like steel needed for putting pipes in the ground. The industry does plan to increase production in the US by about 1.8 million barrels a day this year, but these were planned changes, and already accounted for in the current price.
All this paints a grim picture looking forward for filling up your tank, since there are no easy fixes. Prices may continue to go up.
But it’s still not quite as dire as all this sounds.
The oil industry isn’t the economy
If there is one clear economic outcome from high oil prices, it’s oil company profits. The big five oil companies posted their best profits in over a decade at $35 billion in the first quarter of 2022, margins that will continue to climb as long as prices remain high.
Otherwise, there’s certainly a correlation between gas prices and the health of the US economy, but the exact relationship is murky. “When prices rise, it doesn’t necessarily mean that the economy is falling apart; when prices fall, it doesn’t necessarily mean the economy speeds ahead,” said Clark Williams-Derry, a researcher at the Institute for Energy Economics and Financial Analysis.
The pandemic is an extreme example: Oil prices crashed along with demand. The price of crude oil went briefly negative because producers had to pay to haul it away, since there was such a major surplus and such little capacity for storage. Low prices don’t ensure a booming economy, and they can also make renewable adoption even harder. In September 2020, when gas prices were under $2.20, millions of Americans were out of work, with hundreds of thousands of workers losing their jobs every week.
If political rhetoric still links oil prices to the broader economy, it’s due to lessons learned from the oil shocks of the 1970s that are now dated. “In the 1970s, the reason that the oil crisis was so deadly was the US economy was far more oil-intensive,” Ori said.