A recession could be the ‘cure’ for high gas prices

( Business) — There is a surefire cure for high gas prices. Unfortunately, it’s much worse than the problem itself: a recession.

Nothing kills the demand for oil and drives prices down faster than recessions. Not only do they cause job losses, which means fewer people commute to work, but those who keep their jobs invariably cut back on spending, which means fewer trips to shop or eat out, as well as fewer vacations. All of this reduces the amount of fuel consumed.

Basic economics means that when demand for a product is lower, prices fall, often quite rapidly, unless there is a corresponding drop in supply.

“When the world enters a recession and the demand for raw materials falls, the market [de futuros del petróleo] it is unforgiving,” said oil analyst Andy Lipow.

President Joe Biden has made numerous efforts to deal with soaring gas prices this year: His administration released oil from the nation’s Strategic Petroleum Reserve, which likely had only a marginal impact on prices, and he publicly rebuked US oil companies for high prices, which probably had little effect as oil and gas futures are priced in global markets.

But one of the things keeping oil and gasoline prices at bay in those markets and at gas stations, where prices remain well below the record $5.02 a gallon set in June, is widespread fear that the economy is about to enter a recession.

After hitting that all-time high, the US daily average fell for 98 straight days, to about $3.68 a gallon, as oil prices fell more than 25% during those three months.

Prices have risen again due in large part to the closure of refineries for maintenance or after accidents. Average price was $3.80 as of Saturday, down 10 cents a gallon over the last 10 days. Experts say the prospect of a recession pushed those prices down from June’s peak and prevented them from rising above $4 when refinery troubles surfaced.

“There is now a huge perceived downside risk related to the recession,” said Tom Kloza, chief energy analyst at OPIS, which tracks gas prices for AAA.

And it’s not just US economic concerns that are putting downward pressure on gasoline prices. Recession fears are even more severe in Europe and much of Asia. That is one of the main reasons for the recent decision by OPEC and other oil-exporting states, a group known as OPEC+, to cut production by 2 million barrels per day.

“I think OPEC+ will continue to watch the market, if they see a recession in Europe spreading to the rest of the world, they will take action to support the price of oil,” Lipow said.

What scares OPEC and other oil producers is what recessions have done to oil prices in the past, which is one reason there was no rush to increase oil production when prices soared. after the invasion of Ukraine by Russia.

Prices plummeted during the Great Recession of 2008 and 2009. The average price of a gallon of regular gasoline hit a record high of $4.11 in early July 2008, according to AAA. Six months later, following the collapse of the financial markets, it was down 61% at $1.62. During the brief covid-19 recession in the spring of 2020, oil prices on world markets actually turned negative, albeit briefly, amid a shortage of places to store unused crude.

It doesn’t take a severe economic downturn to drive down gasoline prices. The nine-month recession of 2001 ended with a 37% price drop at the end of that year from its peak. Some of that decline could have been normal seasonal factors, but prices ended the year 25% below where they had been 12 months earlier, removing that seasonal impact.