Gas prices continue to rise in the US 1:02
New York (CNN Business) --
There's not much Joe Biden, Congress or the Federal Reserve can do to bring down record gasoline prices, but high prices could do it for them.
This is because large swings in the prices of a good or service are often caused by an imbalance between supply and demand.
And when imbalances cause prices to spike, as oil and gas prices have since Russia invaded Ukraine in February, those high prices can help rebalance supply and demand.
How?
Causing more supply and/or less demand.
Increasing energy supply, especially enough to rebalance markets, will be difficult.
It would take many months, perhaps years, to significantly ramp up US refinery capacity to match pre-pandemic levels.
And oil companies seem determined not to flood the market with oil, which could drive prices down.
Instead, oil companies are using their windfall profits to boost share buybacks or dividends and help boost their share price.
Inflation in the US rises at the fastest pace since 1981, pushed by the record price of gasoline
And what about demand reduction?
There are already signs that this is happening.
"We're definitely seeing demand destruction at gas stations," said Tom Kloza, global head of energy analysis at OPIS, which tracks prices and volume of gasoline pumped to compile daily price information published by the American Gas Association. Automobile (AAA).
The amount of gasoline pumped at the country's 130,000 gas stations is down 7% in the week ending June 11 compared to the same period last year, and 17% compared to the same week in 2019, before the pandemic, according to OPIS data.
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Without the high prices, US consumption would likely be higher.
There are 6.5 million more people in employment than there were a year ago at this time, according to the Labor Department, and with offices reopening and workers moving again, there should be more demand for gasoline.
But it seems that people are finding ways to drive less: for example, by reducing or making a single trip to run errands, limiting the number of days they go to newly reopened offices, or turning to public transport.
The "cruel reality" is that there is "not much more to be done" in the face of high gasoline prices, US Commerce Secretary admits.
There's enough pent-up demand for vacations that it's not clear many people are willing to give up long-planned trips to avoid paying $5 for gas. But the end of the travel season this summer could lead to a further decline in gasoline demand in the fall, and a further drop in prices.
US gasoline consumption, and prices, tend to decline steadily in the fall and early winter.
"I think consumption is going to start to feel the effects of high prices in the third and fourth quarters," said Robert McNally, president of consultancy Rapidan Energy Group.
"I think we'll be more in the $4 a gallon range because of it."
The biggest risk to demand would be that high gasoline prices plunge the country into a recession.
Nothing kills demand like a recession, which reduces economic activity in general.
When people are laid off, there is less need to drive to work and fewer people driving to the store or other destinations.
The previous record high for gasoline prices, before the current spike, came in July 2008, when the national average hit $4.11 a gallon.
But the collapse of the financial markets and rising unemployment, caused by the bursting of the housing bubble, and not by the cost of gasoline, quickly made those high gas prices a distant memory.
By the end of 2008, the price of gasoline had fallen 60% to $1.62 a gallon.
But cheap gasoline was of little consolation to the nearly 3 million people who lost their jobs over the course of those five months, as what started out as a normal recession turned into the "Great Recession."
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On Wall Street and on corporate boards, concern is growing that another recession is looming.
And there are alarms that consumers' reaction to gasoline prices could be one of the factors that trigger a recession this time.
Consumer spending at businesses other than gas stations has started to decline, according to the latest government reading.
Even with lower gas consumption, people have to spend more at gas stations due to record prices.
And that, in turn, means that people have less to spend elsewhere, a worrying sign for the economy as a whole, because 70% of the US economy is based on consumer spending.
And the United States is only part of the picture.
Oil prices are based on trading in world commodity markets.
Therefore, global consumption, and not just US consumption, is the main driver.
In much of the world, especially developing economies, the price is rising even faster.
That's in part because oil futures are priced in dollars, and a stronger dollar is driving prices up even faster in much of the world, said Pavel Molchanov, an oil analyst at Raymond James.
"The economies most at risk from a $120 barrel of oil are emerging markets where the local currency is under severe pressure," Mochanov said.
"Think about how painful it is to pay $120 a barrel when someone's currency can be down by double digits. That just makes it worse."
So if current oil and gasoline prices cause recessions in economies around the world, not to mention the United States, expect gasoline prices to decline.
But it won't necessarily be something to be happy about.
gasoline hike