This is an article I wrote last June for Smarter Markets.  I was reflecting on the rising price of gasoline and the impending disaster such a situation meant for our economy.  Looking back almost a year later is an interesting exercise for me, and an educational one for some others.

My brief foray into the world of economics was inspired by my dad and a conversation we were having about the “good old days” when gas was less than a dollar per gallon. He decided to compare that to minimum wage at the time which was just about twice the going price of gas. Today, he argued, gas is up to $4 per gallon and the minimum wage (in the state of Oregon) is just shy of $8 per hour. Maybe gas prices aren’t as high as we all think …

I thought his argument was worth some more thought and detailed analysis. Here’s a chart showing the ratio of the national minimum wage (the cost of labor) to the national average gas price (the cost of transportation) per year (Click for a larger image in a new window). Unfortunately, my dad’s argument was just one of coincidence – the relationship we see is nothing near constant.

At the same time, this chart forced me to think about where gas prices and, consequently, the economy are going. On the chart, I have two specific times marked in red and yellow. Red marks the 1973 oil crisis. This is when OPEC cut off our supply of oil and shot our cost of fuel into space. Yellow marks the 1979 energy crisis (second oil crisis). This was after the Iranian revolution when conflict in the middle east once again cut our supply of oil.

You can see sharp drops in the relationship between wages and the price of gasoline after each of these events. We came back from them, but those of you reading ahead see another, sharper, deeper drop that begins about the year 2000. What sparked the “third” oil crisis? Our supply of fossil fuels is not diminished. As a matter of fact, oil companies are reporting growing reserves world-wide! Yet the cost of filling up your car keeps going up.

Where will this chart show the year 2009, I wonder. With gas prices continuing to climb, I predict the chart will continue to approach the floor – the region where every hour worked at minimum wage can buy you less than one gallon of gas. But what does this mean to you?

In a recession, either wages go down or the cost of goods goes up. This is primarily due to inflation. The comparative cost of goods is increasing faster than consumers’ wages can keep up with. Price ceilings and an increase of the minimum wage can limit a recession’s impact on the economy and give the average consumer a short financial reprieve.

In a depression, both wages go down AND the cost of goods goes up. This is due to a combination of inflation and a lack of financial education both among consumers and political leaders. Wages go down either through pay cuts or the necessity of taking a lower-paying job in the wake of a layoff. Prices, however, continue to climb. You can’t hold prices stable and expect companies to pay higher wages at the same time, though … this is why true depressions are so devastating.

What we have on the chart above, though, is something else entirely. Both recessions and depressions are naturally occurring economic situations. Our current dilemma, however, is the result of a confluence of artificial events.

On the one hand, we have large multinational corporations recording record profits with absolutely zero change in the global demand for their product. If demand stays the same (we don’t change our purchasing habits) then there is absolutely zero reason to produce a larger supply OR change the price of the product.

On the other hand, we have a very successful international marketing campaign for the awareness of global climate change (global warming). The price of fuel goes up, and everyone immediately associates the change with either a dwindling global supply of oil or severe negative effects on the environment from fossil fuel use.

In essence, we have lulled the market into a mindset accepting of high fuel prices without due cause. High fuel prices in turn lead to higher shipping costs and increased prices on everything from food to imported wares.

I asked above what this means for you. What it means is that in the very near future we will begin to experience the effects of an artificial depression – a market maelstrom. Prices across the market will follow oil’s lead and begin to rise while consumers’ total income begins to decline. This will affect your business either upstream or downstream of your operation. The real question is, how will you handle the coming market crisis?