Rising Gas Prices Good for American Economy & Politics

Gas prices have exceeded $4 per gallon in some places in the U.S. even as the national average remains slightly lower at $3.963 per gallon. This is good news for both the economy and American politics since we’re also seeing changes in consumer behavior as they voluntarily respond to prices and adjust their buying behavior. We’re not “addicted” to oil or cars.

This was clear in April’s auto sales numbers where Autonation CEO Michael Jackson pointed out that higher retail prices were shifting demand to more fuel efficient vehicles. “It’s a very orderly migration to fuel efficiency,” he told CNBC as consumers find they can find significant fuel efficiency savings by simply moving to vehicles using different technology. Vehicle Miles Traveled per person have also been falling steadily.

Prices are doing what they are supposed to do: Give consumers information about the cost of using products and suppliers information about what consumers are willing to pay. When prices change, the mix of products changes in the market. As Jackson said: American car consumers are fickle. The question is whether car companies can adjust fast enough.

And oil prices aren’t going down soon. Demand in China, India, Africa, South America and elsewhere are driving demand up. T. Boone Pickens sees oil prices going to $125 per barrel by the end of the year (see his comments on CNBC about the 2:15 minute market). The world may face a shortage of about one billion barrels a day according to some estimates, including the Short Term Energy Outlook published by the U.S. Energy Information Administration (powerpoint published April 12, 2011).

In short, Americans are not “addicted” to gasoline or their cars. They adjust, willingly, voluntarily, and relatively quickly. They won’t adjust because the government invests in new green technology. They will adjust because changing market prices will prompt them to re-assess their priorities and purchases and they will follow through with decisions from their pocket book.

Debunking the myth of American oil “addiction” is good for the economy and good for American politics.