Gas prices still climbing - but why all the fuss?

An average gallon of regular in the L.A. area is $4.232, according to the government survey, up nearly a nickel from last week - and more than $1.25 since last fall. Don't look for much relief from oil - crude futures were trading today in NY at a little over $107 a barrel, and Dennis Lockhart, president and CEO of the Atlanta Fed, said that given the instability in the Middle East, he "wouldn't be surprised to see elevated fuel costs for some time." Oil prices are generally bad for the economy, but the New Yorker's James Surowiecki does wonder why they're such a big deal:

If you look just at the dollars involved the terror they inspire is somewhat mysterious. Gas is a relatively small percentage of most household budgets, and prices are now about eighty-five cents a gallon higher than they were twelve months ago, which translates into a few hundred dollars more a year. That's not trivial, particularly for lower-income Americans, but it's not devastating. In fact, it's less than the increase in income that most Americans will get this year as a result of the new payroll-tax cut.

Still, few things loom as large in the public imagination as gas prices, which have an unusual, and much studied, ability to make people feel poorer. Last month's drop in consumer confidence was attributed almost entirely to the spike in gas prices, in line with a 2007 study, by the economists Paul Edelstein and Lutz Kilian, showing that spikes in oil prices have often depressed public sentiment in the past. And Carol Graham and Soumya Chattopadhyay, of the Brookings Institution, have shown that rising gas prices can have a significant impact on Americans' level of happiness. In part, this is because most people, at least in the short run, have no choice but to fill their tanks. Gas prices are also literally the most visible prices we have; you can't take a drive without seeing huge signs reminding you how much gas costs. Dan Ariely, a behavioral economist at Duke, has even argued that the way we buy gasoline--standing at the pump and watching the dollars pile up--is inherently disheartening.

The impact of past oil shocks has been bigger than the numbers alone would suggest.