Will gas prices drag economy back into recession?

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By Jennifer Thomas By Jennifer Thomas

PHOENIX -- We are all feeling the pain at the pump as gas prices have risen dramatically over the last few months and some people say that could drag the economy back into recession.

Research professor Timothy James of the L. William Seidman Research Institute at the W. P. Carey School of Business at Arizona State University doesn’t see that happening, but he also said we probably won’t see prices drop significantly, for a number of reasons.

“We are reaching the season where prices sort of tend to drift upwards,“ he said.

James said switching to more expensive blends, maintenance work on refineries, and summer travel season all have an impact prices.

“I think there are going to be fluctuations in the medium to mid-term of gas prices as the travel season comes and goes, and mix of fuel we use changes,” James said.

Meaning, individually we will feel that pain at the pump, and collectively feel it beyond the gas station.

“So people might cut back on entertainment, you know not going to the theater quite so much, all of those sorts of things,“ he said.

Movie theaters, restaurants, sporting events, clothing stores are all likely to see less business, but James does not believe it will drag the economy into recession.

And, interestingly enough, most people will cut those expenses before they actually drive less.

“All people everywhere all of the time are resistant to driving their cars less,“ he said.

Even in Europe where prices are double those in the U.S. the number of miles driven rarely decreases.

But people do, over time, make a big change.

“But the bigger effect is people start to buy more and more fuel-efficient vehicles through time, but it is a long-term effect," James said. "It takes years for that to happen because the reason you do it is because your old vehicle is dilapidated and you go out and buy yourself another car and the questions people are starting to ask, which they didn’t ask before, is how many gallons will it do.”

And that will pay off because James said also in the long run oil prices are likely to keep rising.

“The price of oil is going to get higher and higher and remain high, but there will be some volatility,“ James said.

He said that is because there are more of us. There are more than twice as many people on the planet now as there were 50 years ago and we're all competing for the same oil, which is driving another cause of rising prices ... speculation.

"If you look at the total number of trades about 2000, 30 percent of them were speculative in nature," James said. "And about now if you look at the level of speculation versus actual usage, 70 percent is speculation, which is making life more difficult for people who really need the oil as opposed to speculating just because they want to make a short-term buck out of it. “

And with those factors included, James said in the long run we can all expect a fill-up to empty our wallets even faster.

“The era of $4 maybe even $5 a gallon is here,“ he said.

James said even though we can continue drilling for more oil, it will progressively get more expensive to do so as we look in more and more remote areas and even more supply will probably not bring down prices significantly.