As the Fourth of July looms and holiday travelers take to the road, motorists can expect to pay more at the pump than last summer.
Even so, AAA®, Wells Fargo Investment Institute, and Wells Fargo Securities experts don’t expect higher gas prices — up nearly 22 percent from 2017 — to affect travel plans or send the economy into a recession as long as they don’t stay above the $3 per gallon threshold.
“While we have seen gas prices drop from the Memorial Day weekend, when they reached a national average of $2.97 a gallon, the bottom line is it’s going to be an expensive summer travel season at the pump,” said Jeanette Casselano, a gas price expert with AAA.
Strong global demand and limited supply, she said, are driving the higher prices, which AAA expects to average between $2.85 and $3.05 per gallon this summer. As of June 27, gas cost an average of $2.85 per gallon nationally — down 12 cents from Memorial Day but still 60 cents higher than a year ago.
John LaForge, head of real assets strategy for Wells Fargo Investment Institute and author of the report, “When Gasoline Prices Matter,” said the 2018 summer travel season bucks price trends.
While it may seem like gas prices rise as drivers hit the road each summer, in reality, LaForge said, prices typically move down — not up — over the summer travel season.
“Historically, gasoline prices in May, June, and July are more often than not falling, on average,” he said. “Still, since gas is made from oil, gas prices are dependent on oil prices, which have been gradually rising due to historically high demand and limited supply.”
Casselano agreed. “This year we have seen the market for crude oil and gasoline be very volatile,” she said. “We’ll have to see what happens with global supply and demand.”
Do rising prices mean a recession is on the way?
LaForge said oil outlooks call for crude oil, or West Texas Intermediate, to slip below $60 a barrel in the second half of 2018. A recent OPEC announcement to increase crude production by potentially 1 million barrels a day would contribute to the lower WTI prices. Today, the price of WTI is just over $71 a barrel. A drop in barrel prices should lead to a drop in gas prices for consumers, but AAA doesn’t expect that to happen until early fall, and it’s likely the drop will not be very dramatic.
Rising oil prices often signal economic growth, he added, and double-digit gas price increases like summer travelers are currently experiencing in the U.S. don’t mean a recession is on the way. The report did find, though, that when gas exceeds the $3 a gallon threshold and stays there, the greater the odds for a recession and decline in presidential approval ratings.
“The higher gas prices move above $3, the better the odds of an eventual recession,” LaForge said. “As for a bear market — no it does not indicate that. But, once again, if gas prices rise above $3 per gallon, on average, stock market gains are likely to slow, as rising gas prices will bite into the consumer’s wallet. The tipping point for concern for slowing stock market gains is $3 per gallon while the tipping point for negative stock market performance is $3.50 per gallon.”
Travelers ‘continue to take their vacations’
Mark Vitner, senior economist at Wells Fargo Securities, believes consumers are better positioned to deal with higher gasoline prices this summer.
“While higher gas prices will crimp spending for some consumers, the overall economy is in pretty good shape,” Vitner said. “Job and income growth have picked up and tax reform has given take-home pay a boost. Automobiles and SUVs are also much more efficient than they used to be, so even though a gallon of gasoline costs a little more today, it should allow consumers to travel a bit further.”
Despite this summer’s prices, gas still costs much less than it did before and after the 2008 recession, Vitner said, and the large decline in gas prices that began in 2014 when the national average was $3.17 a gallon has left consumers better positioned to absorb the increase. He also cited the Energy Information Administration’s expectation that gas prices will decline over the next several years.
Another important trend to note, Vitner said, is that as the price of gas has increased over the past year, Americans have reduced their gas consumption and increased their use of alternative fuels.
Lower-income households are hurt most by rising gas prices since they routinely spend more than 10 percent of their disposable income on gasoline, said LaForge. Even so, he remained optimistic. “We do not believe the current price level is high enough to seriously threaten the consumer, the U.S. economy, or the stock market,” he said.
Casselano added that she does not expect higher gas prices to affect summer travel. “We’ve been a bit spoiled by lower prices the past few summers, but people are more confident about the economy, wages are higher, and they’re not yet experiencing sticker shock, although they think prices should be lower,” she said. “People have told us they’re going to continue to take their vacations and make those road trips. Some may just travel closer to home.”
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Forecasts are based on certain assumptions and on views of market and economic conditions which are subject to change.
West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing.
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