ECON WITH NEDA: Increased gas prices affect overall economy

Neda Ghomeshi / Columnist

By: Neda Ghomeshi / Assistant Opinion Editor

The escalating violence in Libya and the ensuing instability in the Middle East and North Africa has resulted in a surge in crude oil prices over the last week and volatility in global financial markets. According to Bloomberg Businessweek, oil rose to a 29 month high reaching above $100. All of this turmoil adds to the uncertainty investors face, and no investor likes uncertainty.

Libya is the world’s 12th largest oil exporter. According to the International Energy Agency, the country produces about 1.6 million barrels of crude oil per day, which amounts to about 2 percent of the global oil demand. Due to all of the non-stop protesting currently occurring in Libya, it is not a shocker that we are paying 10 percent more at the gas station.

The Washington Post reports: “Analysts estimate that $100 a barrel oil could slow U.S. economic growth by 0.2 or 0.3 of a percentage point.” Higher gas prices affect both personal and business transportation. As a result of higher gas prices, many other products will see price increases as well.

With higher transportation costs, employers may not have as much funding to dedicate to new hires, which will result in less hiring and higher unemployment. This decrease in new hires will adversely affect the United States’ economy, which is still on the fragile path to recovery.

The Labor Department reported that the jobless rate fell to 8.9 percent from 9 percent in January. This is an improvement for the U.S., but still a disappointment. In my Feb. 7, 2011 column, I said, “Revolting against the government and the act of protesting is like the flu – highly contagious… that is detrimental for both the Middle East and the world economy.”

These political uprisings began in Tunisia with the Jasmine Revolution, and extended to Egypt and continued to Jordan, Yemen and Bahrain. We are seeing the aftermath: higher gas prices, amongst other possible future outcomes. The uprisings should cause awareness for investors both domestically and internationally.

Temporarily high gas prices do not affect the economy too much; however, after a long period of time of consistently high gas prices, economic growth begins to slow down. Generally speaking, when gas prices go up, every other commodity goes up in price too.

Here is the problem: just because gas prices are too high does not mean that Americans are going to stay home. Instead, they cut their other spending, such as eating out and shopping. All of these cuts negatively affect our slow, but growing, economy.

Everything happening on the other side of the world is affecting our home.  North Africa and the Middle East are home to the largest oil producers in the world and export a quarter of the world’s oil. Higher gas prices in our country is just the beginning.

Econ with Neda is an economics op-ed column. Look for it every other Monday.