Feb 24, 2011

Gas prices back to $4/gallon this summer?

As parts of the Middle East struggle through democratic revolutions, oil prices have surged over $100 a barrel.

Though the countries experiencing unrest do not export large quantities of oil to the United States, gas prices have risen 12 cents a gallon over the past ten days. The democratic revolutions are occurring close to countries that export oil to the US, many of which depend on the stability of autocratic regimes who are at odds with their population over questions of legitimacy.

Countries like Libya also export oil to other areas around the world, like Europe. As the flow of oil from Libya slows to a trickle, Europe now has to seek oil from other sources. A smaller supply of oil has to accommodate increasing global demand, leading to higher prices.

Some experts are predicting that the average cost at the pump for Americans will reach $4 a gallon.

Skyrocketing fuel costs will have both an economic and a political impact on the US.

First, the prices will severely harm the budget of ordinary Americans. Middle and working class people will have less disposable income. As the cost of moving goods throughout the country increases, shelf prices for food and materials will also mushroom. As a people, Americans will spend less money on entertainment, tourism and luxury goods. While some sectors of the economy will weather the storm or even flourish, it will not offset the impact that the burden of fuel prices will have on the American consumer. In short, the fragile economic recovery is in serious risk.

Second, there will be pressure on Congress to examine measures to reduce the dependence on foreign oil. The Republican House of Representatives may find itself forced to reluctantly embrace programs promoted by the president and the Democratic party like Amtrak, High Speed Rail, and alternative fuel research.

What is clear is that this problem could be solved if Americans were encouraged to use other forms of transportation besides their cars. Some economists and politicians are floating using a $1 gas tax increase to both fund transit and rail programs and get people out of their cars and onto bicycles, sidewalks, buses and trains. Current gasoline tax levels are not enough to fund the insufficient transportation funding in the federal budget now.

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