Although gas prices have fallen over the last few weeks, Monday’s average price for a gallon of unleaded regular edged up to $2.50. Early forecasts from the U.S. Energy Information Administration and AAA had predicted that gasoline prices wouldn’t exceed $2.50 a gallon this summer, but since January, the average price of gasoline has risen from $1.68, the lowest price in years, to $2.65 in June. Needless to say, this surge in crude prices prompted both agencies to revise their figures upward. Both now believe that prices could go as high as $2.75 by Labor Day. According to the Energy Department’s weekly survey, the 56% increase since New Year’s is the fastest pace at which gas has ever risen. Even as we reach for our wallets, a lot of us want to know – what’s causing the price of gas to increase like this?
Well, there may be no single answer, but there’s plenty of speculation. Some analysts believe prices are increasing because of government spending and deficits that have caused the value of the dollar to decrease. Others believe that it’s a reduction in the output of crude oil that’s to blame. Oil production is currently operating at just 80% of capacity. While those two factors are undoubtedly part of the equation, there are two other elements that will probably be the focus of economists as they try to predict where prices will go – supply and demand, and unemployment.
As last summer began, the unemployment rate stood at just 5.5%. This year we’re heading into the summer with an unemployment rate of more than 9.4% – the highest unemployment rate in 25 years. Rising unemployment like that usually drives consumer spending down, as people begin to prioritize their expenses, focusing on necessities before luxuries. When coupled with increasing prices, this trend has the potential to create a dangerous cycle. As prices rise and people have less to spend on other products, businesses lose revenue and may increase layoffs due to reduced demand for their goods and services. Unemployment rises, spending tightens, and the cycle repeats, which leads us to our last point.
The world’s economic slump has been front-page news since last year, and, though there have been some positive signs lately, many Americans intend on skipping their annual summer vacation in 2009, or to take smaller trips closer to home. If that happens, and our nation’s demand for gasoline actually decreases during the summer months, prices could level off at $3.00 or lower – a small dividend for driving less that could happen, but who knows? Check with us in September and we’ll see which factor played the biggest role in determining how much we paid at the pump, because only time will tell. In the meantime, I encourage you to download Cambridge’s FREE guide “Driving As If Your Budget Depends On It,” a helpful e-guide which contains information about how you can maximize your mileage while keeping an eye on your wallet.
For more information, or to speak with a certified credit counselor please contact Cambridge Credit Counseling at 800-897-2200 or www.cambridgecredit.org.