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Rising gas prices raise concerns for US economy

The Wall Street Journal. logo The Wall Street Journal. 7/11/2018 Stephanie Yang

The highest retail gas prices in years are raising concerns about one of the longest-running U.S. economic expansions on record.

Drivers across the U.S. have paid as much as $2.96 a gallon on average this year, the most since 2014. Prices have climbed to $3.63 in California and $3.39 in Washington, states where prices tend to be higher because of factors such as higher taxes, environmental regulations requiring cleaner fuel and a lack of pipelines that transport oil west.

With wages in the U.S. climbing, Americans have so far been able to weather the higher prices. But analysts say that if average gas prices hit $3.50 or even $4 a gallon as global oil prices rise, that could dent growth by eating into disposable income and spending.

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U.S. airlines have already increased ticket prices, and over time higher energy and manufacturing costs can eat into company profits, slowing hiring. Industrial giant 3M Co. and appliance maker Whirlpool Corp. have cited higher material costs as challenges.

The U.S. economy has entered its 10th year of expansion, one of the longest on record, but a Wall Street Journal survey shows most economists think a recession could come in 2020. Rising energy prices can also feed into inflation, which could prompt the Federal Reserve to raise interest rates more aggressively. The central bank has increased interest rates two times this year, and is expected to raise rates another two times.

“People are on the lookout for a downturn,” said Joseph LaVorgna, chief economist for the Americas at Natixis. “Tight monetary policy combined with rising energy costs is typically not a good development for U.S. households.”

While the stock market and employment trends remain strong, threats loom with the U.S.-China trade dispute. On Friday, both countries slapped levies of $34 billion on each others’ exports, kicking off America’s biggest trade battle since the Great Depression.

Investors have also spotted signs of a slowdown in other markets. Last week, a widely watched difference between Treasury yields—known as the yield curve—fell to its lowest in nearly 11 years—a development that can suggest economic weakness.

“Every recession has been preceded by two things: an inverted yield curve and rising oil and gas,” Mr. LaVorgna said.

A steady depletion of inventories and global demand have propelled oil to the highest prices in over three years. On Tuesday, U.S. oil futures closed up 0.4% at $74.11, near the highest level since November 2014.

President Donald Trump has blamed Organization of the Petroleum Exporting Countries and asked Saudi Arabia to further increase output. On July 4, he tweeted, “The OPEC Monopoly must remember that gas prices are up & they are doing little to help.”

Related video: Why Are Oil Prices Rising?

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Analysts said Mr. Trump may be trying to lower gas prices ahead of this year’s midterm elections. However, his tweets have had mixed effects.

“The gasoline story in the U.S. is very much a geopolitical story. It’s down to OPEC, its down to Saudi Arabia and it’s down to Iran,” said James McCullagh, an analyst at Energy Aspects. “Ultimately the price of crude isn’t playing ball at the moment,” he said.

A surging oil market is rarely the sole factor in triggering a downturn. Strong fuel demand is one of the reasons that crude prices have gained this year. But in recent months, rising prices have been attributed to concerns over a possible supply shock, which could pose a greater threat to the global economy than a demand-driven rally.

Other indicators on the health of U.S. energy demand are mixed. Vehicle miles traveled in April fell a seasonally adjusted 0.6% compared with the previous year, according to the Transportation Department. Gasoline demand fell year-over-year in both May and June, the first consecutive monthly decline since the start of 2017, the financial firm Cowen & Co. estimates.

Deserey Morales, who works at a nightclub in L.A., said she finds current gas prices “ridiculous.”

But she said it wouldn’t change how much she drives.

“You still have to do what you have to do,” Ms. Morales said. “I don’t really have the choice.”

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