RESEARCH Business Economy

GAS & THE ECONOMY
Rising gasoline prices likely to adversely affect other economic sectors

Andrea Lynn, Humanities Editor
(217) 333-2177; a-lynn@uiuc.edu

6/1/2001

CHAMPAIGN, Ill. — The money that drivers in the Chicago area are paying for higher gasoline prices not only is leaving their wallets at an accelerated pace, it's leaving the region, too, according to a new economic analysis. If unchecked, the prices could siphon $1.2 billion from the economy – that’s $11.26 a week out of every household wallet.

If the prices hold for 12 months, the increases could cost $821 million in industrial sales, a loss of nearly 19,000 full- and part-time jobs and the loss of $535 million from household income.

In Chicago's case, moving money from one pocket to another "generates a negative impact," said Geoffrey Hewings, the director of the study, because as opposed to money spent on food and clothing and other items, "money spent on gas circulates less in the economy since oil refineries and production are located outside the region." Now topping off at an average of $2 a gallon, but possibly going to $3 this summer, Chicago's gas prices are the highest in the nation. "For many households, the increase is viewed as a minor irritation, but for lower income households, it represents a significant additional burden."

The analysis was conducted by the University of Illinois' Regional Economics Applications Lab (REAL), a joint venture of the UI and the Federal Reserve Bank of Chicago; the report was released April 24. Because the average price of gas nationally is about $1.65 a gallon, the results for Chicago cannot be extrapolated to the United States, according to Hewings, a UI professor of geography.

For their study, Hewings and John JY Seo, the senior research associate for the study, who is employed by the Federal Reserve Bank, focused on two components: sales increases in the local petroleum and coal products sector, and negative impacts on local consumption. With the major issue being the "income redistribution effect" of dramatic rises in gas prices, the research team implemented a scenario using CREIM (Chicago Region Econometric Input/Output Model), a regional general equilibrium model developed by REAL that undertakes impact analyses and annual forecasts for the period 1998-2023.

Of the 53 sectors the researchers looked at, durable goods and services took the worst hits. Hewings speculated that if gas prices hold, consumers might shy away from buying big-ticket items, or decide not to eat out as often. "However, if consumers perceive that the prices will decrease later this year, then the impact will be more muted," Hewings said.

Working in the economy's favor is that incomes are going up, Hewings said, "so in real terms the gas increases are much smaller." Still, because gas prices went up quickly and dramatically, consumers perceive the prices to be much higher than they really are. "Two dollars today is about $1.50-$1.60 in 1990 prices, a little higher than what we paid for gas then – but not by much," he said.

Hewings said that researchers at REAL and other economists were not blindsided by the sudden sharp rises at the pump since they knew months ahead about "capacity problems and the need to produce a variety of different blends in Illinois to meet specific regional air-quality issues."