With today's volatile oil prices, paying $4 a gallon for gasoline during the heavy driving season this summer is a fair bet and even $5 a gallon isn't unthinkable. Though we at Kiplinger do not expect oil prices to skyrocket beyond about $110 a barrel this summer, any major supply threat -- heightened tensions with Iran over its nuclear ambitions or significant weather-related disruptions to U.S. refineries, for example -- would likely send motor fuel prices soaring, at least temporarily.
True, the U.S. economy is no longer as dependent on oil as it was 40, 30 or even 20 years ago, but sharp energy price hikes still pack a wallop. Gasoline prices reaching and staying at $5 a gallon for three or four months would likely shave at least a few tenths of a percentage point off already lackluster economic growth for the year. Consumers would reduce their spending on other goods and services to offset the higher tab at the pump. Businesses would likely be more cautious about hiring, adding months to the already achingly slow recovery of the 8 million jobs lost in the recession. The impact would be felt, in ways both obvious and subtle, across the economy.
1. Crowded Commuter Trains and Buses
Public transit ridership will soar as more folks trade the convenience of driving their own cars to work for the savings of a shared subway bench. In summer 2008, when gasoline prices last peaked, mass transit use across the nation jumped 6.5% from the summer 2007 level. If pump prices hit $5 a gallon this year, even more folks will ditch their daily drives.
Higher fuel bills will take a toll on transit budgets, too. Aside from labor, fuel is the biggest expense transit systems face. Nationwide, mass transit systems account for about 783 million gallons of gasoline and diesel use per year. Philadelphia is already budgeting an extra $1.5 million for diesel fuel when its current purchase contract is renewed this summer. And that's assuming a price well below $5 a gallon. If pump prices hit the $5 mark, it'll cost Philly an additional $2 million.
Nationwide, a 20% to 30% hike in prices would add $3.3 billion to $3.5 billion to the cost of public transit operations, in many cases forcing them to jack up passenger fares. The saving grace: A recent round of robust fare hikes at many transit systems means officials in some cities and counties will be reluctant to push through another increase.
Megabus, BoltBus and other transit lines that run between major cities will book up fast, in part because ticket prices aren't likely to rise much with the increase in gasoline costs. In 2006 and again in 2008, ridership rose enough for companies to offset the extra expense without raising fares. But since these bus lines charge based on popularity of travel times and dates, as well as how far in advance tickets are purchased, riders will have to either firm up their plans early or be flexible about traveling at off-hours to reap the benefit.