Guest Post: Tracking The Next Gasoline Induced Recession

Tyler Durden's picture

Submitted by Lance Roberts of Street Talk Advisors

Tracking The Next Gasoline Induced Recession

There has been a LOT of talk recently on the rising price of gasoline at the pump, so much so, that Obama has now jumped in with both feet admonishing the "evil speculators" for causing such a burden upon the American public.   Well, that and to promote a clean energy policy that is ill conceived, ineffective and grossly misunderstood...mostly by him.

However, as in the famous words of Bill Clinton, "What is...IS" and what "is" right now is that gasoline is rapidly approaching, and has achieved in some states already, $4 a gallon.   Therefore, that is what should be concerned with right now and when that additional drain on the discretionary income of the average American translates into the next economic recession.

The chart shows the inflation adjusted average of all grades of gasoline (regular, mid and premium) going back to 1990.   What we find is that by looking at gasoline prices - spikes have tended to lead to economic recessions.    However, during the 90's households did not substantially increase their debt to maintain their living standards but beginning in 2000, households tacked on an additional 50% in debt to offset the effects of rising oil, food and gasoline prices.   In fact, as food and energy consumed a larger and larger percentage of wages and salaries the ability to take on additional debt through credit cards, mortgage withdrawals, etc. to offset the rising cost pressures stalled in 2006 and begin to decline sharply in 2007.   This is why we wrote in December of 2007 that we were "either in or about to be in a recession" - a year later the NBER proved us right.  

This leads us to the question that we now must answer - how long can the consumer go this time WITHOUT access to easy credit, struggling with high unemployment, and lack of wage growth before the effects of higher food and energy costs put a stranglehold on discretionary spending.   This becomes an even more important question as we are already looking at reductions in GDP forecasts across the board and the potential, and most likely temporary, end to support from the Federal Reserve. 

So, what would it take in order for this spike not to lead to an economic recession.    First, the average American would need to go back to work with an increase in wages to knock the percentage be eaten up by higher food and energy prices back down to the 18% level.    Furthermore, the banks would need to open back up the tap to allow consumers to have access to credit.  This sounds easy enough until you realize that you just opened Pandora's box as we have now just instilled the three legs to hyperinflation - commodity inflation, wage inflation and velocity of money.   Now the Fed has to raising interest rates to battle rising inflationary pressures and the economy slows into recession as a result of tightening monetary policy.    This is why the Fed is trapped in a box and cannot, for very long, withdraw support from the economy and the financial markets - it is a game that will end badly at some point in the future.  

The trap is set and there is an increasing probability that by the end of this year, or early next, we may be writing the next chapter in American recessions.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Hedgetard55's picture

I'm not worried. Timmay Jeethner says rising gas prices will not slow the "recovery", unless, of course, we do not raise the debt ceiling.

Hedgetard55's picture

Not to mention he reaffirmed Treasury and Barry's desire for a strong dollar.

Cleanclog's picture

Timmy and Ben are liars.  I just paid more than $70 to fill my tank which was not empty.  Northern California.

sun tzu's picture

Barry says to trade in your gas guzzler for a GM Volt

Cleanclog's picture

It's a small station wagon that gets 28 mpg.  I say Varry Ovama should Bolt his Volt.

greyghost's picture

bad math...bad already paid for!!!!! HOW MUCH GASOLINE CAN I BUY FOR THE $41,000 PRICE OF THE SHIT VOLT????????

dynomutt's picture

How about this for feeding the decision-making process:


Depreciating asset with a loan whose terms are fixed at signing where the currency risk is on the bank (US gov't) which will allow for reduced consumption of a fuel which is a recurring cost and extremely speculative.


If gasoline is $20/gal and your car payment is still $500/mo, is it still better to keep your beater?

patb's picture

Sure, if you drive 20 miles a week or less.


if you drive 200 miles a week, like most americans then yeah, your gas bill is way more then a car payment


SheepDog-One's picture

'Gas has achieved, in some states, $4 already'
5 states have gas over $5 right now.

Pchelar's picture

If they tap the SPR there is nothing AT ALL stopping OPEC from simply deciding to cut production by whatever amount the US govt. releases from the SPR.

dynomutt's picture



SDR = Special Drawing Rights, an alternative to any individual country's currency for use in international trade, possibly denominated in gold.

SPR = Strategic Petroleum Reserve.

surfersd's picture

thanks for pointing that out pchelar

Diogenes's picture

Except they need every dollar they can get to keep their own political system going.

Mark Noonan's picture

There is no reason to worry - the Associated Press reports today that only oil at $150 a barrel could possibly derail this stupendous economic recovery...

besodemuerte's picture

The chart shows the inflation adjusted average of all grades of gasoline (regular, mid and premium) going back to 1990.   What we find is that by looking at gasoline prices - spikes have tended to lead to economic recessions.


I don't see the correlation.  There are plenty of spikes in gasoline prices during the given period, just because gas went up two years ago doesn't mean it's a reliable metric.  Granted high gasoline sucks and can't be good, but it's salt and pepper compared to the steaks of housing, unemployment, debt, etc.

That Peak Oil Guy's picture

Lol, you can read a graph?

Energy is one of the fundamental basic inputs to an economy.  Its effects are magnified in the bottom line.  The graph shows that the last decade was fucked economically and I don't think anyone would dispute that.  It corresponds very well to high oil costs.

Also look at the energy crisis of the 70s for more correlation.


besodemuerte's picture

Of course high energy input costs hurt.  This graph does not show that we'll be having a 'gasoline induced recession'.  Yes the last decade has been rough, however, the '01 recession was when gas was $1.25 which is what it has been for the last 20 years.  Then 6 years of growth as gas double from $1.50 to $3 until finally hitting another recession which certainly was not another 'gasoline induced recession'. 

Don't be a jerk, everyone knows how oil prices affect growth.  This article is pretty weak though as I put more attention on $14 trillion in debt, 90% debt/gdp, 20% unemployment, an ever increasing money supply, abyssmal housing, corruption, idiotic fiscal policy.

Oil is of utmost importance I acknowledge that, but the chronically ill system causes recessions.  Oil isn't on fire because the world is bursting at the seems with unicorns and rainbows of economic growth, it's because the Treasury and the Fed are spinning their wheels trading hundreds of billions of dollars every month causing our dollar to drop like Lindsey Lohan and inflation is permeating everywhere on the globe like radiation in Japan.

I don't even know why I have to type this out, I assume you're either trolling or just trying to be an internet superstar.

That Peak Oil Guy's picture

It was a good rant, thanks for typing.  :-)


Flakmeister's picture

It is a catch-22 of sorts.... Without Bennie and his Inkjets, the economy would be DOA... the fact that the economy has any life means that we are hitting our heads on the ceiling of oil production... Pick your poison, "cheap oil" and deflationary collapse or expensive oil and the semblance of an economy...

Don't worry, high oil prices are ultimately deflationary....

Inspector Bird's picture

Utilizing 2 points on a short graph "proves" nothing.  I see a relationship, but no correlation, between price spikes and 2 recessions.  However, not every recession has been caused by a price spike and not every price spike in the past has caused a recession.


Don't mean we won't have one, but there are a million reasons why that will happen....such as....too much debt, too much fake cash floating around and a loss in confidence in the dollar, banks that are "healthy" but really aren't....ahhhh I can pretty much see lots of reasons for a recession.  Doesn't have to be increased price at the pump.  In fact, as painful as it is, the one thing I can say after being out of work for 8 months and finally finding a job (that pays much less than my last one) is that this price increase has had less impact on me than the one right after Katrina (which, oddly, DIDN'T lead to a recession).


Yes, eventually these price increases are going to work their way through the price matrix of the economy.  Yes, it's taking more of the average discretionary dollar.  No, it's not taking as much of mine because I've started walking and riding my bike whenever I can.  It's called the Substitution Effect.  I use it whenever I can.

johnnynaps's picture

We didn't have a recession after Katrina because people were still making $50,000 by painting their house. They were also able to tap that house as an ATM. Now ask yourself, if you take home $28,000 a year, and your gas expenditure eats $1,000 more this year, is that good for your personal Economy? Same principal applies when dealing with the "real" Economy!

Strategery's picture

No worries . Remember, the Fed has told us that this is 'transitory.'

Loose-Tools's picture

On a long enough timeline ... everything is "transitory"!

SheepDog-One's picture

True, and on a long enough timeline, ALL demand is destructed!

bothsidesnow's picture

It is transitory when the Fed starts to withdraw liquidity the specs have less free money to play with.

All the messages coming out in the last few weeks Obama, China, Saudi's is to tell the specs this round of the game is over.

The shills and trolls continue to make it sound like the game is still on because they wan't to milk the last dollars out of the bag holders.


redpill's picture

I'm long UCO.  Does that make me a domestic terrorist?

Cash_is_Trash's picture

Do you hold silver and gold? If yes, you are very dangerous.

redpill's picture

Not only that, but I even have a coin from Norfed*


* for collecting purposes only of course

Long-John-Silver's picture

People who hold copper clad lead are even more dangerous.


SheepDog-One's picture

So we're right about there. Good, Im sick of this day to day bullshit for 2 years.

Dr. Richard Head's picture

Exactly.  I used to fear the collapse when I was wearing those government issued rose-colored glasses.  Ever since I ripped those damned things off the collapse of the LOLlar is something welcomed, by me, with open arms and an open personal bullion vault.

Sure many will be hurt during the transition, but none of the people in my circle will be able to say that I didn't warn them.  So far, those people in my world have been able to point to the accuracy and truth to what has been told to them by me.  I ain't Chicken Little, just a Dick Head.

6 String's picture

OT: You always KNOW silver will flash crash every single time ZH starts posting too much about the price of Silver when it goes skyward along with a bullish thesis laid out by Sprott Asset Management. Those two happening at once always signals a flash crash is about to take place on the COMEX.

I think at this point long dollar, short crude, long t-bills is the safe bet -- because everything that seems like the dumbest trade ever seems to work out to a tee in this casino.

hambone's picture

George Costanza school of investing - research and educate yourself, determine the best short, medium, long term course of action - then do exactly the opposite.  Today's winning strategy.

SheepDog-One's picture

Inverse investing in the rigged casino seems to usually always work, hindsight tested of course and throwing out all the crashed stock examples along the way. It is guaranteed to work until it suddenly doesnt.

hambone's picture

SD1- I think I'm done with this shit.  Take what I have left and go long Amazon and IYR.  The good lord seems to shine his contenance upon these.  Those who bet against them (or even question their value) are destined for a horrible, smotten, burning / gnashing of teeth life here on earth and in the afterlife.

css1971's picture

Well, Yuhuh.

This has been discussed on The Oil Drum for the last couple of years, and I have been timing my switch to cash by the oil price. What exactly do you think "productivity" is? It is the conversion of human labour to machine labour. Human labour is based on food, machine is fuel. So when machine labour increases in price, productivity falls. When productivity falls, the debts can't be paid. They are predicated on always running faster and faster.

Having said that I'm not sure there will be an actual crash this time. The money pump is already primed.


Considering Peak Oil. This process is going to continue until we are not hitting the limits of oil production. One way or another.

Dr. Richard Head's picture

Crash will depend on how long the Congress debates on the debt ceiling.  As the Audit the Fed in the Senate showed (Thanks Bernie Sanders), when the life of the cental planners is threatened a quake in the markets will be utilized to scare an action response. 

What was it?  $4 Billion a day being shoved into the equity markets during QE2?  Notice how the debt ceiling debate and "end" of QE2 coincide rather nicely?  Primary dealers will sit on their greased hands in order to shake the foundation of the boomer generation 401K's.  Liquidity tap turned off to commence action. 

Expect a crash should our congress even attempt to posture in finding their testicles.  Politcal theater and economic suicide bombings.   

That Peak Oil Guy's picture

The US government is already doing something about it.  That is why they have troops all over the ME.  But the one-two puch of peak oil and money printing are irresistable in their force.

Think about it; what should be happening is.  We have a supply problem and now prices must rise.  Get used to this.  Flow rates will never be able to keep up with the way we have gotten used to using oil, so prices must go up to cause demand destruction.

Instead of blaming the governement for our problems we need to concentrate on getting ourselves ready for the energy crisis, and for using a lot less oil personally.


CrashisOptimistic's picture

Sorry, there is no discretionary oil usage anymore.  It's all at a bare minimum.

Less oil means less life.  People are going to die.  5 billion of them. Soon.

That Peak Oil Guy's picture

Perhaps.  But sometimes I like to slip back into denial mode and be more optimistic than that.  ;-)


Inspector Bird's picture

Doomsayers exist for a reason, I suppose.  Julian Simon has, generally, been correct when you back track his philosophy throughout time.  Man is ingenius, inventive, and entrepreneurial. 

In addition, price movements open new markets.


I don't see us running out of energy anytime soon and eventually the price movement up will hit a point where lots of weird alternatives make good common sense....and prices will plateau and perhaps fall.


I really don't see us running out of oil, either.  There is still quite a bit untapped.  And eventually political pressure and price action will make all of it open for business.


Meantime, some weird dude tinkering in his backyard is going to find a solution to the issue.  Actually, I know someone who did.  He has a stable hydrogen based fuel that current cars can run on.  Oddly, he can't manufacture it anymore because Homeland Security confiscated all his equipment because it runs afoul of current seems this stuff is easy to get off the internet, but when you buy it all in a group you trigger some kind of "potential terrorist" alert.  If I were a tin-foil hat type, I'd think it was deliberate conspiracy by the oil companies.  But the same rules were used to shut down a meth lab locally, so it does ring true.

Flakmeister's picture

  Do you have a subscription to "Cornucopian Illustrated"?

Thermodynamics is a real bitch, I suggest you learn some...

Piranhanoia's picture

I do want to be sure it was sarcasm regarding "no discretionary oil usage anymore" before I blew lunch on the screen.

sun tzu's picture

They're also shutting down domestic oil production all across America.

That Peak Oil Guy's picture

Right, it's a conspiracy. /sarc

Read this from ROCKMAN at The Oil Drum. ROCKMAN is a Texas oilman:

"There’s an even more important aspect re: potential increase in URR (ultimately recoverable reserves) from the application of EOR (enhanced oil recovery): ITS ALREADY BEEN DONE IN ALL APPLICABLE US FIELDS! This is the most frustrating aspect of such discussions. What the heck do folks think we do for a living: leave profitable oil in the ground because we’re all billionaires and don’t need the money?. LOL. Many seem to think the oil patch has been sitting on its butt and hasn’t applied EOR in all applicable fields. EOR has been a major activity in the domestic oil patch FOR OVER 50 YEARS! IOW those big gains in URR have already been achieved."


Nels's picture

The US government is already doing something about it.  That is why they have troops all over the ME.  But the one-two puch of peak oil and money printing are irresistable in their force.

I don't understand what purpose you think the troops in the ME are fulfilling.  It cannot be to get us more oil or cheaper oil.  Either would be a lot easier to do by opening ANWR or by not shutting down the Permian Basin to save a reptile.   The most those troops will do is to direct the flow of oil money away from Gaddhafi to some other preferred potentate or oligarchy.


That Peak Oil Guy's picture

How much oil does ANWR have?  How much can you get out at once?  What are the maximum flow rates projected out of the Dakotas?  I think you will find that all these numbers are much too small to help much with your gas bill.  Though they may help keep the food distribution system going for a while longer.

Let's say you are right, though, and we have a butt load more oil in our own country.  Why would we want to use it before tapping the rest of the world?  Seems like that would be a strategic asset good for continued world domination in the post-peak world.


SheepDog-One's picture

Besaides, how long would it take to ramp up that oil production, a couple years at least Id guess.