As gasoline prices reach $4 a gallon in California and threaten to climb to $5, how worried should we be? Plenty.
Each dollar hike in gasoline prices costs Americans about $130 billion a year. For 2012, that would essentially cancel the benefits of this year’s payroll tax cut and extended unemployment benefits. Consumers, particularly lower income households, would have less to spend on other goods and services. Many businesses, particularly those with high transportation costs, would see profit margins squeezed. The stock market could reflect the resulting slowing in sales and earnings.
While $5 per gas prices would probably not push the economy into recession, they would dampen growth. The faster and further prices rise the greater will be the threat to the recovery.
Events in the Middle East will dictate what happens to gas prices in coming months. A closure of the Gulf of Hormuz by Iran to oil shipments could hurt its own economy severely and evoke swift Israeli reaction. A unilateral attack by Israel would trigger severe repercussions for its country. The implications for radical moves by key players in the region could thus be serious and prevent radical moves, but the Middle East is often unpredictable.
Remain on watch.