Hitting the breaks: $4 gas could slow economic recovery, study says

Jan 24, 2011 By Marc Ransford

A significant jump in gasoline prices from the current $3 to $4 a gallon has the potential to slow Indiana's economy, where the unemployment rate currently is about 9.8 percent, says a new Ball State University study.

"The Effect of Higher Fuel Prices on Indiana's Economy," a report from Ball State's Center for Business and Economic Research (CBER), finds that $1 per gallon and $25 per barrel price increases would depress economic activity by about 2 percent, increase the unemployment rate by roughly 1.3 percent and lower state tax revenues by about one half of one percent or about $68 million.

"There are projections that these price increases could occur by later this spring, and if so, we would have a repeat of a similar price surge that occurred from the summer of 2007 to summer of 2008, initiating the recession," warned Michael Hicks, CBER director. "Fortunately, this effect will be less painful during an than it was at the start of the last recession. But a gasoline price increase of this amount will slow the recovery in Indiana."

Hicks points out that from June 2007 to June 2008, the average gasoline price in U.S. cities rose from $3.05 to $4.06. During the same period, the unemployment rate in Indiana rose from 4.5 percent to 5.6 percent.

While part of this increase could be attributed to a slowing of new home construction and higher interest rates — both factors in the bursting of the nation's housing bubble —CBER's analysis of monthly data from 1978 through the present finds that a $1 change in gasoline prices is associated with a 1.3 to 1.5 percent increase in the .

"Even with advances in energy efficient vehicles, public transportation and alternative fuels, we remain very dependent on petroleum and an increase in its price slows the U.S. and Indiana economies," Hicks emphasized.

Price surge started with the recession
The study found that the '07-'08 gas price increase came with a that preceded by 10 months of the September 2008 stock market decline.

In Indiana, the effect of higher gasoline prices was especially problematic in some regions due to the state's concentration of automotive and recreational vehicle-related manufacturing.

Hicks notes that the last major layoff in Elkhart County in northern Indiana happened in August 2008, a full month prior to the collapse of Lehman Brothers and the sharp national increase in unemployment.

"Any increase in today will have very similar effect," he said. "While we are a nation in economic recovery, with a more fuel efficient vehicle stock than in 2007, the overall consequences of a similar gasoline price increase will be indistinguishable from the 2007-2008 period."

Explore further: Do consumers think products are better when companies donate to charity?

Related Stories

Recommended for you

Do government technology investments pay off?

Mar 30, 2015

Studies confirm that IT investments in companies improve productivity and efficiency. University of Michigan professor M.S. Krishnan wondered if the same was true for government.

Study finds assisted housing works, but it could be improved

Mar 30, 2015

Two researchers from the University of Kansas Department of Urban Planning have just completed a study on the locations of assisted housing units and assisted households across the nation. It examines one of the key issues ...

Economist probes the high cost of health care

Mar 27, 2015

When Zack Cooper arrived at Yale as assistant professor of public health and economics, he gained access to a first-of-its-kind dataset. Working with the non-profit Health Care Cost Institute, Cooper and ...

User comments : 4

Adjust slider to filter visible comments by rank

Display comments: newest first

not rated yet Jan 24, 2011
Americans still have very cheap fuel compared to their European counterparts that pay around twice as much for fuel eg UK pay 128.42p for a litre which converts to $7.73USD per US gallon
not rated yet Jan 25, 2011
Is the value of oil rising or is the value of the dollar declining?
not rated yet Jan 26, 2011
Americans still have very cheap fuel compared to their European counterparts that pay around twice as much for fuel eg UK pay 128.42p for a litre which converts to $7.73USD per US gallon

If gasoline prices ever get that high in the U.S., and assuming no cold fusion, we're done...

For people with mean income, the price of owning and operating an automobile in the U.S. across ten years is already somewhere around 18% of income, and is much higher than that for people below the mean income. Of this amount, over 1/3 is the cost of fuel. If fuel was 7.73 per gallon, then the total cost of an automobile increases by around 44%...Which would mean that Mean income people would then be spending an average of 26% of their income on automobile alone...

Oh yeah. Gas mileage has not improved in my entire life time. In fact, I'd argue it's gotten worse, as the governments have put so many "green" restrictions on vehicles emissions, which hurts the engine's max efficiency.
not rated yet Jan 26, 2011
Is the value of oil rising or is the value of the dollar declining?


China, India, and Africa are using more oil than they used to, as are south america. None of them are really even at their peak demand yet. Not even close.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.