How Oil and Gas Prices Affect the Way We Look at Global Economy

People who earn less spend a larger percentage of their income on gasoline, so they’re affected the most by price spikes. The most recent price spike happened when Russia invaded Ukraine and Brent crude futures almost hit $140 a barrel. 

In the past, geopolitical tensions, natural calamities, and increased travel demand during the summer driving season were forces pushing prices higher. At the individual level, higher gas prices mean that each of us pays more at the pump, leaving less to spend on other goods and services. But higher gas prices affect more than just the cost to fill up at the gas station; higher gas prices have an effect on the broader economy.

The gas market chaos, which has driven prices 280% higher in Europe this year, leading to a 100%-plus surge in the United States, is a cause for blame due to a number of factors from low storage levels to carbon prices to reduction in Russian supplies.

Why are prices rising?

When gas prices rise, it can be a drag on the economy, impacting everything from consumer spending to the price of airline tickets to hiring practices. 

Gas prices have been rising for weeks due to the conflict and in anticipation of potential sanctions on the Russian energy sector.

Even before the U.S. ban, many Western energy companies including ExxonMobil and BP moved to cut ties with Russia and limit imports. Shell, which purchased a shipment of Russian oil this weekend, apologized for the move on Tuesday amid international criticism and pledged to halt further purchases of Russian energy supplies. Preliminary data from the U.S. Energy Department shows imports of Russian crude dropped to zero in the last week in February.

Affect on Public Transportation

Gas is an important element for transportation. This directly impacts households, but also businesses that rely on logistics and transportation chains around the globe. Higher gas prices can result in noticeable increases in some public transportation ridership. Shared and public transportation may become more appealing if gas prices continue to rise as it provides a more cost-effective alternative to sitting in traffic with expensive fuel in the tank.

Affect on Auto Industry

The automobile industry has historically responded to rising gasoline prices by using these periods as opportunities to manufacture smaller, more fuel-efficient cars, such as hybrids and, most recently, all-electric cars that can travel up to 250 miles between charges. 

Affect on Central Banks 

Central banks are sticking with the line that the spike in inflation is temporary, European Central Bank board member Isabel Schnabel said on Monday she was happy with the broad-based rise in inflation. But as market and consumer-based measures of inflation expectations rise, gas prices will be on central banks’ radar.

Summing Up

In general, higher oil prices are a drag on the economy. Though economists and analysts may argue about the extent to which gas prices have an effect on the economy, there is, at the least, a correlation between consumer confidence, spending habits, and gas prices. An August 2020 Gallup poll in the United States, for example, indicates that individuals’ views of the economy appear to be inversely correlated to the price of gasoline. The poll showed that increases in state gas prices made respondents feel more pessimistic about the economy over the time period in question. 

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