What Price of Gas Says About the Economy

06/23/2014 12:01 am EST

Focus: STRATEGIES

Jim Jubak

Founder and Editor, JubakPicks.com

This driving season, MoneyShow's Jim Jubak thinks it's important to watch the price of gas, not just for what you're paying at the pump, but as an indicator of GDP growth in the US.

For the week that ended June 18, this is, as we're going into the big summer driving season, we saw gasoline prices rise, not a whole lot, 1.2 cents a gallon, bringing the price of an average gallon across the United States up to $3.68 or so. The thing is a) usually gasoline prices fall during the summer driving season. That's because, not because there's less demand because there's more demand, but refineries go into full-scale operation. They know what's coming. They've built inventories, et cetera, so gasoline prices tend to fall, so the fact that they're rising as we go into that season is unusual and second is that the increase may not be a very short-term blip of a week or two. The worry is that really something is going to happen in Iraq that will reduce that countries oil exports, put less oil in the market, the cost of a gallon of gasoline is—well probably somewhere around two thirds of that is actually the price of oil, so if oil prices go up, gasoline prices will go up and there's some thought that really we could wind up with gas prices being about 10 cents a gallon higher by the end of driving season if things go badly in Iraq.

No one is exactly sure what's going to happen in Iraq. We've got ISIS, the Islamic State of Iraq and Syria moving south. They've taken and then the government is trying to take back control of Iraq's biggest domestic refinery. That's not a big piece of news for the global oil market. Right now, we've got a situation where the southern fields, which produce about 75% of Iraq's oil and essentially all of its oil exports, are still firmly in the hands of the bad guy government. If that doesn't change, then we're not looking at a whole lot going on here that will drive up gas prices and oil prices very, very quickly. The worry, of course, if you're not simply trying to figure out how to fill your tank for a decent price or what gas station to shop at, the worry is that higher gas prices will take something out of the US economy, that higher gas prices mean higher costs for doing things like shipping and by truck or for driving to getting to work and all of that takes a little bit out of economic growth. If you're spending money on gas, you're not spending it on groceries basically or anything else, so that's the worry here. The larger worry is that we're looking at an increase in gasoline prices, 10 cents a gallon would be—you know not a whole lot, but enough given this sort of anemic nature of the US economy at the moment to really raise fears that we're going to see a lower GDP growth than expected for the second and third quarter. That's what I do when you pull into the pump, watch gas prices, not just for how much money you have to take out of your pocket, but as an indicator of how growth might be going in the United States.

Related Articles on STRATEGIES