by Joe Blaikie

Created on: July 13, 2008

The American economy is in dangerous territory right now. It has been severely weakened by the bursting of the housing bubble. It has been weakened by the falling value of the dollar. When you add rising gas prices into the mix, the outlook for turnaround looks increasingly grim.

It might sound like reckless exaggeration to assert that the price of gas can make or break the mighty U.S. economy. But let us first examine the nature of our current economy. We have transitioned from a manufacturing-based economy to a distribution and service economy. Now more than ever our economy runs on gas. Gas fuels the trucks that bring goods to our distribution centers and then to the stores. Gas fuels the vehicles of customers who go to stores to buy goods or services. When the price of gas rises, the price of anything that is transported rises as suppliers pass the cost increases on to customers.

Meanwhile, the customers feel the increased cost on two fronts. First the cost of the goods and services they buy are increased. Second, the cost of driving to work and driving to the store is increased. If the costs increase too much, consumer behavior will start to change. They will buy less. They will go out to eat or to the movies less. They will cut back their spending any way that they can.

The current American economy relies heavily on consumption. If people buy fewer items and use fewer services, pretty soon people start to get fired or laid off. If people lose their jobs, they spend even less. This reduces consumption still further and leads to more job losses. The cycle continues and the economy worsens. People then start to default on their loans and an already weak financial market gets even weaker. If the cycle continues for too long the result will be an economic depression.

The problem isn't that the price of gas is increasing. The problem is how quickly and dramatically it is increasing. One expects the price of things to increase over time. The economy can absorb normal rates of increase without fear of depression. But when the price of an item as vital to the entire economy as gasoline is virtually doubles in less than a year, the result is a chain reaction of inflation that can lead to a very grave situation.

The most distressing part of this problem is that there is no sign that it will be solved anytime soon. Our leaders have let us get to this point by insufficiently funding and legislating the necessary transition to alternative energy sources and by standing in the way of increasing our domestic supply. Their only substantial effort has been to mandate the use of ethanol and that has done little to reduce the cost of gas, while doing a lot to drive up the price of corn and food in general.

The longer this problem goes unresolved, the deeper the downward spiral of the economy will be. Most worrisome of all are the rising tensions with Iran. If anything happens to disrupt the flow of oil from Iran, or if Iran disrupts oil shipments in the Persian Gulf, the already high price of gas will skyrocket to unthinkable levels. Such a price shock could bring the economy to a screeching halt.

Rising gas prices have us on the path to an economic depression. The question is, will leaders rise up in the public and private sectors to chart a new course for energy policy or will we just stay on the road to our economic ruin?

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