With ongoing conflict in Russia and increased turmoil in the Middle East, I’d expect gas prices to be higher than normal. On top of that, Joe Biden’s presidency has been characterized by inflation. Given those facts, I was surprised by the precipitous gas price drop in Utah late last year. When I was in Seattle recently and saw prices over $4.00, I was even more confused. Prices in Utah had fallen to under $3, and currently average $2.72; what made Seattle so different [1]? Responding to my shock, my dad explained the recent enactment of a new gasoline tax in the state. Knowing my hometown, the lack of recoil shouldn’t be surprising; Seattle-ites, being more environmentally-conscious, didn’t really care.
The Seattle attitude does not reflect America’s greater concern with gas prices. Seven out of ten Americans say that gas prices affect their feelings about the economy. Presidential Biden’s approval ratings were well-correlated with gas prices. It’s no wonder that Americans take gas prices as a sign of economic well-being; in the first quarter of 2022, spending on fuel made up 2.6% of disposable spending [2]. On top of that, gas prices are fairly easy to track. It’s hard to miss a price that’s plastered on signs lining major roads, and the price variations are not too complex [3]. The Seattle tax made sense to me, but I still didn’t understand why prices had dropped so heavily in Utah. As a confused economics major, I took it upon myself to better understand the recent drop.
My mind was drawn to supply and demand, the core of price changes. Perhaps the most obvious case of supply disruptions comes from overseas conflict. Gas prices generally track crude oil prices [4]. The US gets 61.5% of its crude oil from North America; even though most of its oil comes from North America, supply shocks in other areas have the potential to affect prices at home [5]. A conflict like the invasion of Ukraine has the potential to stifle the crude oil trade. Right after the invasion, US gas prices spiked, then fell for 98 days straight, making the conflict seem like a nonfactor with the recent drop in prices [8]. Another key determinant of worldwide oil prices is OPEC, a cartel that controls the supply of oil sold by member countries and produces about 40% of the world’s crude oil [7]. In my research, no source claimed that loose OPEC policy caused the drop in US gas prices, though OPEC has announced supply cuts to combat low prices [9]. If anything, high US oil production has depressed prices [9].
Gas prices also follow a seasonal cycle that has nothing to do with geopolitical circumstances. Gas prices generally drop starting in September. At this time, pumps start using a cheaper winter blend of gasoline, leading to a price drop of anywhere from $0.10 to $0.30 [10]. On top of this, the winter is a low period for demand; Americans like to do their driving in the summer [1]. Weather patterns can also curtail demand. Experts predict that El Niño will cut demand by 7% this winter [11].
Clearly, gas prices can result from factors that have little to do with the overall economic state. Low prices can even be an indicator of a recession, unlike what we’d expect. At the beginning of the Great Recession, the average gas price fell $2.49 in six months [8]. When the COVID-19 pandemic hit, gas prices dropped abruptly, then rose afterwards [13].
Admittedly, research does show a tie between gas prices and unemployment. The stagflation of the 1970s is often blamed on the increase in price of crude oil [14]. Understandably, Americans look for shortcuts when assessing the economy and the performance of their president. In some cases, their assessment is correct, as gasoline serves as an input for other industries and cuts into discretionary spending. However, we should hesitate to judge our economic condition on gas prices. Don’t get me wrong, as a driver of a GMC Sierra and a co-owner of a moving company, I am grateful for low gas prices. But when prices lift, maybe we can learn a lesson from Seattle-ites and not let that influence our mood about the economy or the current administration. So many factors can influence prices, factors beyond our president’s control, and gas prices are not a true indicator of economic well-being, as they could be signaling different conditions. Though fast and easy, we ought to remember that gas prices are only a crude measure.
