Many Utahns are feeling the pinch at the pump as gas prices continue to soar across the U.S. And while the recent rise in gas prices has captured headlines, BYU economics professor Christian vom Lehn says gas prices started rising long before the conflict in Ukraine began. In this Q&A, vom Lehn explains the sharp jump in gas prices, inflation, and the state of the post-pandemic economy.
Q: Why are gas prices rising so rapidly?
Gas prices have been rising for some time now. Over the past year, the average national price of a gallon of gas has risen by more than $1.50; that’s a large increase, and almost half of that happened prior to the conflict in Ukraine. But the recent surge in gas prices is clearly related to the violence in Ukraine. Gas prices rise quickly when there’s any expectation of future disruption to the energy supply.
In recent years, Canada has been the biggest foreign oil supplier to the U.S., while Russia is a distant second. The U.S. also produces a lot of energy domestically, so it’s not like the US is (or was) bringing in a ton of Russian oil, but other places around the world were (and are). As other countries reduce their Russian imports of oil and gas, they’re looking to switch to the sources of oil that the U.S. produces or that others produce and sell to the U.S. This change (and the expectation of it to increase in the future) is driving up prices.
Q: How long can we expect to see gas prices rise?
There’s a very common saying: ‘Gas prices rise like a rocket, fall like a feather.’ The price of gas responds quickly to changes in the price of oil as well as any expectations that this price will go up in the future. But even after the price of oil starts falling, gas stations are still selling gas that they purchased at the previously high price, so they keep their prices high until they resupply with oil at the new cheaper price. We’re seeing the rocket part now and we’ll see what happens in the future; early indicators suggest prices may start to slowly come down, since the price of oil has started to decline from its peak in the first week of March.
Q: What other factors add to the rise of inflation in the US?
In addition to the rising costs induced by the current international conflict (affecting oil, gas and likely wheat soon, since Ukraine is a major exporter of wheat), there are really three big factors that have been contributing to inflation over the past year.
The pandemic affected business operations around the world. Two years of disruption means that we're behind on producing many things, including oil. It's been hard for businesses to catch up with the pace at which people are looking to purchase goods and services as life returns to normal. Because of this, we see prices that are higher than we'd expect.
We may be seeing the effects of government stimulus policies. To help navigate the pandemic, the government introduced various stimulus policies such as direct payments to bank accounts or the Federal Reserve's actions to keep interest rates low. These actions were undertaken to help stabilize the economy and prevent severe individual economic distress due to lost jobs or incomes during the pandemic. The effects of these policies may be showing up now in higher spending levels than we'd normally expect. Higher spending, even in good times, will tend to push prices up.
Spending patterns have changed. The pandemic has changed lifestyles in so many ways and it's unclear if these changes will be permanent or temporary. One big change is that people are now purchasing more things that they can enjoy at home. That's shifted consumption patterns towards goods that can be shipped and delivered to doorsteps. Rather than going out to a restaurant or a theater or to a hair salon, people are opting to buy food to eat at home, home theater systems, and hair clippers. With this big shift, it's hard for businesses in these goods sectors to keep up with the unprecedented rate of purchasing of these products. This places an unprecedented strain on logistics and shipping and delivery and transportation, and drives up production costs across the board, generating higher prices.
Q: Are gas prices the highest they've ever been?
It is true that today’s gas prices are the highest they’ve ever been, but that statement is a bit misleading. If you go back to the 1920s, gas was only 25 cents or so, but hourly wages were also very low, so people couldn’t buy much gas anyway. Once you account for the inflation that has occurred over the past century, the real cost of gas has generally been falling over time.
Even accounting for inflation, gas is still very expensive right now, but not that much more expensive than what we saw in the early 2000s and still cheaper than what we saw a century ago.
Q: What does the future of the economy look like?
It’s always good to remember that gas prices are not the only price in the economy. It’s easy to react strongly to the price of gas because we see that price as we drive by gas stations every day. When it comes to overall inflation, eventually, we expect incomes to adjust and catch up, which is what I’m hopeful for. But in the short run, it is painful.
In the meanwhile, what you buy matters, as some prices are rising much more than others. In Utah, some of the biggest cost increases have come in gas, cars, meat products, and some appliances/electronics. To the extent that you can shift your spending patterns toward other products until prices stabilize and incomes adjust, you can possibly reduce your exposure to the rising prices in the economy right now.
