Could Higher Gas Prices Actually Stimulate Economic Growth?

For the last several months, nearly every time you’ve paid a visit to the pumps, you’ve probably noticed that the price of gasoline has been creeping upward. Indeed, with prices set to reach the $4 per gallon average mark this spring (considered by some as a tipping point), it would appear that, as always, the problem is a result of growing global demand for oil, plus tensions in the Middle East. These in turn make investors jittery, fueling speculation due to perceived oil price instability.

Now while a politically delicate situation in Libya plus continued fighting in Syria and economic sanctions against Iran are no doubt playing a factor (especially considering the latter is still one of the world’s major oil producers), there are some who believe a much more significant reason for the recent price hikes is declining oil supplies caused by the shuttering of a record number of oil refineries.

“We have almost 700,000 barrels of refining capacity [eliminated] in the last three months, that is almost five percent of U.S. gasoline production,” remarked Fadel Gheit, a senior energy analyst at Oppenheimer and Company.

But why are these refineries being shut, especially at a time when it appears that economic recovery is upon us?

It’s apparently due to these facilities being older, less profitable locations that simply couldn’t be upgraded in a cost effective manner to meet requirements for removing sulfur content from heavy crude, while supplies of light, sweet crude, which such refineries traditionally relied upon, have become more expensive and harder to obtain.

Another factor is that the U.S. is not importing gasoline like it has in the past Actually, large American oil companies are exporting it due to an abundance of cheap natural gas available inside the U.S. Via processes such as cracking, natural gas is being used to refine crude oil into gasoline, which in turn can be sold for greater profit overseas, since gasoline consumption in the U.S. is actually dropping.

“This enables [U.S. producers] to land gasoline in Mexico, cheaper than Mexican refiners can produce it for,” Gheit said yet while less gasoline to go around domestically is causing prices to rise, some believe that unlike in the past, there are signs that greater pump prices could actually stimulate economic growth rather than hinder it, according to energy analyst Phil Verleger, who’s been following the industry for decades.

But how? Verleger cites the fact that when fuel prices rise, Americans are spurned to purchase more fuel efficient vehicles, driving up demand for new cars and thus stimulating production. This considered particularly significant, since even today, for according to U.S. economic data, around 20 percent of the entire national manufacturing sector still depends on auto production.


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  • Max Reid

    Very interesting article.

    Read these lines
    “supplies of light, sweet crude, which such refineries traditionally relied upon, have become more expensive and harder to obtain.”

    “natural gas is being used to refine crude oil into gasoline”

    The article in the NPR link add
    “American refiners are using this cheap, domestic natural gas to produce the heat needed to crack crude oil into products like gasoline.”

    So the natgas is also included in the Oil Consumption and the actual oil consumption is not 89 million b/d as told. It includes
    LPG, Natgas, Biofuels as well. Its a clear proof that Oil production is not increasing with the demand and no wonder the price is going up. No use in blaming Iran or Syria or Libya.

    Yes, there are lot of fuel efficient vehicles and also many vehicles with V6 engines are fading away. Recently I learnt that Equinox and Terrain has dropped their V6 engines and retain only V4.

  • MrEnergyCzar

    In some areas it can stimulate the economy. Weapons manufacturing, war support companies, military equipment manufacturing etc…. Anything to do with oil wars…


  • John K.

    The plug-in Prius should be arriving to market at the PERFECT time! Yippie!

  • BEW

    Please note the article is from NPR. I assume that means National Public Radio.

  • Duude

    Spin baby spin

  • Cathie

    NOPE, just the opposite, I’ll just cut back on frivolous spending…plan my all of my trips in one day, and just save more.