Today, some experts are predicting that gas prices in the United States will hit $4 per gallon by the end of the year. Needless to say, other experts dispute this possibility. As much as I would love to say that this is an obvious panic marking a top in prices, it is worth considering what would happen if they are right.
Gas prices at $4 per gallon would represent a doubling of price over the course of two years. It would be over 30% inflation from right now. This is inflation all by itself, even before you consider that just about every object you could possibly have in your home needed fuel to get there, either in the manufacturing process or the delivery process. Expect general inflation to come on the heels of such an increase in fuel costs.
Increased inflation means Agent Greenspan must swing into action, raising interest rates. This means interest rates will go up for loans, credit cards, and mortgages. For goodness sakes, if you have ignored my warnings to lock in your adjustable rate mortgage, this may be your last chance! One benefit to Joe and Jane Average is that the interest paid on bonds will also go up, and there is a slim chance that interest paid on their savings may go up ever so slightly. Of course, this also means that the national debt will grow even faster.
Consumer and employee confidence are already down. And no wonder! Planned layoffs are continuing to outpace planned new hires. Expect a continued decline in confidence if gas hits $4 per gallon. Wal-Mart was concerned about gas prices a year ago, estimating it was costing their customers an additional $7 per week; one can only imagine what the internally circulated numbers look like now. Gas prices are now bad enough that Wendy’s is willing to blame poor sales on high gas prices.
As CNN reported yesterday (see previous post for link), people are already changing their habits due to high gas prices. That will continue. Unnecessary trips will not happen. That means less shopping, less eating out, fewer after-school activities. The malls will be trying to come up with interesting ways to get people into the building. The guys who downgraded the company which owns Olive Garden and Red Lobster will look like geniuses. People will be bringing brown bags to work with them, partly to save money and partly to save gas. If $4 per gallon gas persists, private school enrollment might also suffer, as such institutions often draw students from several miles away.
However, internet and mail order businesses will see increased orders. Whether they will profit from this depends on whether they can keep shipping costs reasonable. eBay will continue to see decent traffic as the intersection of people trying to turn unneeded objects into cash and people looking for online bargains.
Truck and SUV sales are already plunging. Expect a continued shift away from low fuel efficiency vehicles. Light truck prices, particularly in the used vehicle market, will plunge. Detroit will not be able to prop up truck sales with incentives in the long run. Many people will reevaluate whether or not they really need a large vehicle; some will sell, while others will get a small high efficiency “around town” vehicle for everyday use. Some insurance fraud is possible as truck owners decide it is easier to have the truck stolen than to sell it.
Mass transit will be all the rage. Well managed systems will benefit; poorly managed systems will collapse under their own ridership. Being near train and bus stops will be a plus rather than a minus for homes. People will — perhaps for a limited time — be willing to support taxes and mass transit initiatives.
There used to be a bit of buzz about people moving to “exurbia,” that place a little farther out than the suburbs, where there is still a slightly country feel, yards are big, and houses cost less. People who went for that bigger cheaper house further out are feeling the pinch of gas prices, and it will only get worse. Double that if they over-extended themselves to buy it. Property on the edges of metropolitan areas will decline in value as these exurban areas will no longer be seen as commutable. Some families will even reevaluate whether it is cost effective for both parents to drive to work every day.
Finally, people will walk away from debts. Between rising day-to-day expenses and tougher bankruptcy laws going into effect this month, there will be people who just decide to stop sending a check to Chase Manhattan or GMAC every month. “Go ahead, cancel my credit card,” and “Please, take back the truck I can’t afford to gas up anyway.”
I hope I am overreacting. Better yet, I hope the experts are wrong.