Gas prices are skyrocketing. Here’s Why People Haven’t Cut Spending Yet

In the week ending last Saturday, there was a 5% drop in the amount of gasoline pumped at U.S. gas stations compared to the same week a year ago, according to OPIS, which tracks gasoline prices and consumption data. The modest decline occurred as the national average price fell from $3.04 per gallon on May 29, 2021 to $4.60 per gallon on May 28 of this year, according to OPIS data released by AAA.

Generally, when the price of a good increases, its consumption decreases, a process known as “demand destruction”. But gasoline is what economists call an “inelastic” purchase, which means that its consumption is little affected by its price.

Gasoline consumption shows no significant signs of slowing, even in states with the highest average prices, such as California, where the statewide average is now $6.21. per gallon, the highest in the country.

“We’re seeing demand destruction around the world, but in the United States it seems people are stubborn,” said Tom Kloza, global head of energy analytics at OPIS. “California taught us that $6.20 a gallon can be tolerated.”

Kloza said data shows drivers are switching fuels purchases at low-cost stations, such as those at big-box retailers like Costco (COST), and away from the more convenient but more expensive stations owned by individual operators. And he believes consumers are taking small steps to limit driving, such as making more stops on a single trip to shop, rather than making multiple trips to different stores.
As for travel, Kloza said it’s possible that many people who have the option of working from home have started to cut back on their trips to the office. Others may be using public transit or carpooling to get to work.
The sharp increase in the number of people working at least part-time from home and the fact that the US economy has yet to recover all the jobs it had before the pandemic explain why consumption has fallen by around 15 % compared to 2019, when there was a record. Gasoline consumption in the United States.

But even with this 15% drop in consumption, drivers are spending far more at the pumps than before the pandemic, as prices have soared 67% compared to the same period in 2019. And that’s a problem for the economy as a whole, as it could force consumers to cut back on spending on other items.

“I don’t think people will save much on their driving,” said Mark Zandi, chief economist at Moody’s Analytics. “The blow will be dealt to other forms of discretionary spending.”

The typical U.S. household buys about 90 gallons of gasoline a month, Kloza said, so the price increase from $3.04 a year ago to a record $4.72 a gallon in the reading of Thursday will cost an additional $150 per month.

The country’s overall economy is primarily driven by consumer spending, so if consumers opt out of other discretionary purchases – dining out, buying clothes, vacations – that would be a major headwind, Zandi said, even as the country’s energy sector gets a boost as a result.

“The general rule is that for every $10 increase in the price of a barrel of oil, it cuts GDP by a tenth of a point,” Zandi added, referring to gross domestic product, the broadest measure of health. economy of the country.

Data through April shows consumer spending holding up reasonably well despite gasoline prices already at record highs, Zandi said.

Spending at retailers other than gas stations increased 1% in April from March and 6% above April 2021, even as spending at gas stations soared 37% over the past year due to rising prices.

Spending on other items is likely to take a hit as gasoline prices continue to climb from their April levels, Zandi said. It could even change people’s view of the economy itself, leading to a change in behavior, because if there’s one product that consumers are hyper price conscious about, it’s gasoline “I think oil and gas prices play an outsized role in people’s thinking about the economy and their own financial situation,” he said.

Zandi also fears that if oil prices continue to rise, raising the rate of inflation, the Federal Reserve will be forced to take a more aggressive approach to raising interest rates, which could tip the economy into a tailspin. recession.

“With oil prices at $115 a barrel, it’s very uncomfortable,” Zandi said. That’s close to the level of oil futures that were trading Thursday midday. “At $130 a barrel, we’re on the edge. If it hits $150, I don’t think there’s a way out of getting into a recession.”

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