Despite the hand-wringing in the headlines.
The price of oil has soared about 150% from the oil-bust low in early 2016, with WTI hovering at around $71 a barrel over the past few days. The price of gasoline has surged 50% over the period, and now the warnings are proliferating on how it will hit consumer spending.
According to the Energy Department’s EIA, the average price of gasoline, all grades combined across all states, reached $2.95 per gallon for the week ended May 14. This is up from below $2 a gallon during the low point of the oil bust in early 2016.
Across the entire grade spectrum, the average price ranges from $2.79 for regular in “conventional areas” to $3.57 for premium in “reformulated areas,” such as California. In terms of boots-on-the-ground data, we just filled up in San Francisco with regular for $3.70 a gallon. For a lot of drivers, $4-gas is once again showing up on the horizon.
These price increases come at the nick of time: Just as driving season is kicking off.
Nobody is worrying yet that these prices, which are still relatively low compared to pre-oil-bust highs, will impact consumer behavior in some dreadful ways, such as massively driving less or buying fuel-efficient low-profit compact cars that US automakers are now abandoning instead of buying big high-profit SUVs. That nightmarish scenario is not even close.
In 2008, $4-gas — as measured by the EIA’s average price — was the pain threshold that nudged some consumers to modify their behavior to lessen the impact. By now the threshold that would nudge Americans to modify their behavior, and cut demand for gasoline, would likely be closer to $5, based on the EIA’s nationwide all-grades average – which would translate into something closer to $6 in California. This price is still far away – and folks are not concerned about it.
But concerns are percolating up that today’s higher gas prices – even if they’re not high enough to change consumer behavior – are impacting consumer spending. USA Today summarized this fear with the title, “Higher gas prices are eating into Trump tax cut, trimming spending by Americans.”
Note: “…trimming spending by Americans.” We’ll get to that in a moment.
According to the Tax Policy Center, the new tax law will save the average middle-class American about $930 in federal income taxes in 2018. USA Today then goes on:
The jump in gasoline prices the past year, if sustained, would cost the average American $450 a year, offsetting about half the tax benefit, says Mark Zandi, chief economist of Moody’s Analytics.
As a result, “the tax cuts will be a boost to the average American, not a boon,” Zandi says.
As always, low income households get hit the hardest. USA Today, citing a Morgan Stanley report, noted that low-income households spend about 8% of their income on gasoline, while the top 20% of the spectrum spend only about 1% of their income on gasoline. Hence, gasoline price increases have a big impact at the lower end of the income spectrum.
But here’s the thing: Every dime that gets spend on higher gasoline costs is part of retail spending and therefore is part of consumer spending:
High-income consumers who spend more on gasoline will likely not cut back on other things. Instead, their total spending will rise just a tad due to higher gasoline costs.
Low-income consumers already spend every dime they make and can borrow, and will continue to do so, no matter what happens. When gasoline prices rise, these consumers go through a painful triage exercise, as to what gets bought and what doesn’t get bought. Fill up the car with more expensive gasoline and forget about buying that outfit for the kid? Some of them might even try to cut back on driving. But they’ll keep spending every dime they can get.
On net, higher gasoline prices shift some consumer spending from other categories to gasoline. So there’s a revenue shift among industries – but no decline in overall consumer spending. It’s this revenue shift that affected industries are worried about.
However, higher oil prices have a positive impact in the US oil patch, which got hit hard during the oil bust. Also some of the items that consumers switch away from in order to buy gasoline are imported and have no US content. This might whittle down imports just a tiny bit. So in terms of overall consumer spending, higher gasoline prices don’t change the propensity of Americans to spend. They just change the mix.
Which sheds a different light on phrases like “…trimming spending by Americans.”
Higher gasoline prices do have a nasty impact on households that now have to spend more to go to work or to the store, and at the lower income levels, they’ll feel real pain and they’ll have to cut back on other discretionary purchases. But since they’ll keep spending every dime they have, their pain will not hit overall spending – though maybe fast food restaurants, apparel stores, and the like are losing some share of this spending, while other industries gain.
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Gas prices DO cut into consumer spending in other areas. Your big city bias/focus on short commuter trips is distorting your thoughts. Higher interest rates and gas prices do impact the average worker.
Read the article all the way down, and don’t just react to the headline.
Gasoline IS PART OF consumer spending. Consumers spend more on gasoline and perhaps a little less on other things (depending on where they are on the income spectrum). So overall spending stays the same.
High gas prices just change the MIX, not overall spending, and the mix changes constantly anyway. That’s what the article is all about: that higher gasoline prices won’t cut into overall retail spending and consumer spending (by definition).
The article also addresses the issues households at the lower income levels face, namely the triage they have go through, but that they’ll continue to spend every dime they have, and that therefore overall consumer spending is not impacted.
Is saving for one’s underfunded pension by purchasing stocks, bonds, a pass book saving account, counted as discretionary consumer spending?
If I understood you correctly:
Putting money into a savings account, purchases of investments (stocks, bonds, annuity, etc.), buying a home, etc. are NOT part of consumer spending on the logic that this money is not spent but invested.
But buying a car is part of consumer spending.
By the same perplexing Fed/PhD-handicapped logic, “buying” (yield-less) gold would *not* be “investing” and would have to be put down as “consumer spending”…
Idiocy. “Investing” in a near-yieldless world IS spending.
Don’t forget that freight prices have been rising steadily with the added demand from e-commerce, add the higher fuel expense and consumer goods will go up in value as freight rates spike and vendors pass the expense on to the consumer.
The freight contractors used to buy bulk at a discount. I suppose they still do, and a great deal of quasi government transportation is on CNG, so rising gasoline prices fall mostly on the retail consumer. No idea how a cutback in retail gasoline production would affect diesel refining and prices. We used to have a national energy agency which oversaw these problems nowadays who knows? We used to have an SPR as well, which could be used to manipulate the price we pay for imports. The national concern over energy policy is zero right now.
In Canada the Diesel price is rising with Gasoline prices, only lower by 10 cents a litre, or close to 40 cents a gallon. They always go up together. Even CNG in Canada has been rising, it was .60/litre Mar of last year. It is now .88/litre average across the nation.
No matter what the fuel the fleets consume, the price is going up.
It was noted during the Great Depression that people would give up milk for the baby before they’d give up spending on gasoline.
Skipping a day of work outs you deeper in the hole. One bottle of milk, the baby will survive.
Bad to be scraping by in any era.
‘higher gasoline prices won’t cut into overall retail spending and consumer spending (by definition).’
Exactly, so as the statement is true by definition it can’t contain empirical information (also by definition)
By these terms if gas prices went up by ten times there would still be no impact on consumer spending. But there would be a recession.
However as an empirical matter of fact there is a difference between increased spending for MORE of something and increased spending due to higher prices.
The motorist who drives away from the pump 10 dollars lighter isn’t leaving with any more gas. He just has ten less dollars to spend where he will get something for it.
It would be interesting to know the multiplier effect of higher gas expenditures. We know it doesn’t circulate in the local economy.
No doubt Texas and the frackers are happier but some of it is ending up in the Middle East.
BTW: I’m not saying the definition is incorrect, it can’t be.
But these economic definitions have limitations.
The GDP is notorious. About five years ago the UK narrowly missed a predicted recession. The reason: the increased expenditure on heating bills due to a colder winter.
The GDP includes these bills by definition. But the citizens of the UK weren’t better off, they were worse off.
They could theoretically boost the GDP by several percent by leaving the windows open. In fact they would be reduced to poverty.
Alexander – I agree.
Points to Consider:
Rising interest rates
Global growth slowing
Liquidity being reduced by CB’s
Yield curve continues to flatten
Domestic growth has weakened
Credit growth continues to slow
Rising energy prices are a tax on consumption
Stock buybacks are on track to $650 billion this year, smashing the previous record of $589 billion set in 2007.
This has the effect of boosting wages for the top 20% of wage earners, while the lower 80% see their wages shrinking via cost-push inflation.
Since revenues are driven by economic growth, of which 70% is derived from consumption, higher energy prices put further curbs on consumption. Which defines the consumer cutting overall spending.
Today I’m shocked at what is considered “middle class income.” Retired (since 1994) average monthly income especially the since the sub low interest rates on CD’s since 2004 onward and the after crash zero rates, around $2500 month, the “average” price in my area (Sierra foothills CA) for the “87 Octane” is now $3.49. Watching the meter pass $50 when filling up it certainly will “constrain” my “consumer spending” which in my income bracket paying a mortgage ($550 mo.) is for needed items only. I’m not complaining. I’m just shocked at what is considered middle class today compared to 30+ years ago. I moved away from the heart of Silicon Valley 20 years ago and never looked back. Live well on my small union pension plus SS and CD savings. But that CD savings has paid nothing for years. Yes, could have gambled after the crash but grew up during the Great Depression and have memories on the life our whole family did back then in San Francisco and being first generation Americans.
This will effect tons of people. Splitting hairs about “consumer spending” and “restrictions” etc……..reality is reality.
But, thanks for another good article.
That $3.49 average price is not in the mountains but in the Central Valley. Up in our area the price is closer to $3.60 gallon and up.
Not really semantices, but towards the end of the article you did point out that consumer spending is thus triaged by poorer folks. This defintely affects the economy, particularly dining out, perfume coffees, food purchases, etc.
Where I live, Canada, where we are taxed very high on petroleum products even though our country is self sufficient in energy by over 2X, (we know we won’t run out if there is a big disruption even though our prices might rise higher), triage is the way it works for sure. It’s pretty much only the ignorant or very wealthy who aren’t concerned with high gas prices. If a family spends $600 month commuting that is $600 per month not spent elsewhere for sure.
Here is an analogy that fits quite nicely. There is an alcoholic down the street. Nice guy. He drinks at least 1.5 bottles of vodka per day…and smokes. He is very thin, and his face is purple. By the afternoon he is corned and there are always a few ‘bduddies’ over there in the afternoon and they aren’t just visiting. A year ago his wife left him and insists he now sell the house. He has sold his snow mobiles, two quads, some kayaks, the furniture left with the wife but has not been replaced, and he continues to drink. He has a big truck in the garage which he seldom drives anymore (Thank God), but somehow he always manages to get the vodka into his hand every day. Everything else is slowly disappearing. That is what higher gas prices do to people. They try to continue on but things start falling off the plate and don’t get done. Sure, the consumer spending is the same but every other aspect of life is reduced as all costs increase due to higher transportation costs.
In our house we do have money and can pretty much live the way we want to. But we don’t. I run into town on a motorcycle and enjoy the $12 fill as opposed to the $45 fill for the Yaris or $70 for my little beater truck. Hey, I can strap a 40lbs sack of feed on the back or put 5 full grocery bags into the soft side saddlebags, drive home in 1/2 the time for 1/3 the cost. That is what high gas prices do. You reduce when the costs rise.
To paraphrase Wolf, I hope, higher gas prices have micro-economic but not macro-economic impact on consumer spending.
Relatively higher gas prices won’t cause a demand-side shock until it crosses some price level as Wolf notes.
It’s pretty much only the ignorant or very wealthy who aren’t concerned with high gas prices. If a family spends $600 month commuting that is $600 per month not spent elsewhere for sure.
$600 spent on fuel has more or less the same effect on the economy in aggregate as $600 spent on anything else. In fact, for oil and gas producing countries like Canada, it might even be a net positive. Better we’re spending on North American sourced gasoline than on consumer junk imported from China.
But butbutbut … I don’t give a flying flip about gas prices. Does that make me wealthy? Ignorant? Nope just a bike rider and user of public transit when it’s rainy or I’m going a longer distance than I want to on my bike.
40% of U.S. oil consumption is imported so 40% of every gallon burned adds to the trade deficit.
Well, that’s crude oil. The refined retail product is value added in the US to imported crude.
Wrong, the effect on economy is predicated on trickle down effects.
An extra $100 or $200 per month spent on fuel does not generate any increase in economic activity. You are consuming the same amount of fuel at a higher price. The $100 or $200 you are not spending on other discretionary items however has a negative effect on the economy. The need for goods and services in other areas of the economy is decreased resulting in less demand for labor and hours worked. This in turn reduces spending further and becomes a deteriorating cycle.
Nobody spends $600 per month on fuel unless they are buying barrels of the stuff to burn in their back yard to piss off their neighbors. Americans may enjoy wasting fuel and thumbing their noses at environmentalist but $600 per month is a ridiculous exaggeration. Even your typical red neck would need to roll coal 24-7 to accomplish that achievement.
Gasoline should be taxed at $10 per gallon but liberals would never stand for it (no fairsies if the rich can afford to drive while the poor can’t) and goes without saying conservatives would starting pooping bricks.
$600 is a high value in the USA but Paulo isn’t in the USA. He is in the area of Canada with the highest gas prices.
I alone consume $450+ in a fuel efficient vehicle due to my location in Canada, if I had prices like Vancouver I would easily clear $600. I can’t walk to work or I wouldn’t get to work.
Your van by the river is far from the norm in Canada. Only normal in Vancouver under a bridge actually.
A 35 mile commute in a pickup would do it.
30 days * 70 miles * $3 / 10 mpg
And, yeah, someone is doing that, even if it is not common. Imagine a big rural county and you have an old pickup and a job in town.
You guys! Here in England, the cheapest lead-free “petrol”, as call it, costs £1.20 a litre. That’s equivalent to $6.13 a gallon.
The difference, of course, lies in government taxes.
Jefferson said that, “When the people fear their government, there is tyranny; when the government fears the people, there is liberty”.
It seems that, however little liberty there is in the USA, there is only about half as much in the UK.
Heck no it won’t. We’ll just whip out the Mastercard and worry about it next month. #YOLO
Rising gas prices is great for pushing adoption of Renewable energy vehicles, bring it on.
The price of gasoline would have to increase a lot more than 50% to really make EV’s economic.
You know that they are just an economic con when they have to rely on things like a $7500 tax credit to get them out the door.
And if can use a $7500 tax credit in one year to reduce your tax you are in an income bracket where you don’t need to worry about the price of gasoline in the first place.
And here in OZ we still pay 30% more than you people in the USA for regular – not the average across the spectrum.
If you want to see what happens when policies and governments allow oligopolies to push up prices all you have to do is look at the electricity market here in Oz.
Renewables, especially roof top PVI systems. can be economical depending on your energy use and pricing. Prices soared here from 15 cents per kWh in 2007 to over 40 cents today. Now that kind of price increase will make people change, adapt, use less, and look for alternatives.
With water we had the same range of price increases, but other than reduce usage there is little one can do. You can try putting in water tanks, but that is not going to save you much of anything. You can use grey water for the lawn, but again it costs to put the system in and the payback period like water tanks is in decades, if ever.
(Ever get a water with $$20 or $40 of water use and see the other fees and charges bring it up to over $200???)
And don’t bother trying to off the grid here as far as water is concerned. As water is government run operation most will still charge you fees even though you don’t use a drop of water as the pipe runs by your house!!
He never mentioned EV’s. What about bicycles? they use very little fuel and are nearly 98% efficient. For the pathetically lazy (the typical American) bikes are now available as EV’s so you don’t even have to peddle. An EV powered bike uses about 1 kW on a typical 30 mile round trip commute – or about 12 cents depending where and how you source your electricity.
Walmart now has EV bikes starting under $400
What worries me is the effect rising oil prices will have on the price of everything else. What I mean by that is the effect it will have on such things as transportation of goods (food for example) along with energy costs, which will eventually reverberate, seismically, throughout most of the economy in higher retail prices and utilities, which, in my very lowly opinion, are already high enough as it is, especially for most of us older sods now living on our very fixed meager incomes, minus all the interest we should have been earning on our savings all these years.
More 1970s, US automakers pushed gas guzzlers right into the oil embargo, and Japan started selling its compacts in the US. Their hubris was startling, and this time around its the banks, which are considered bullet proof.
Gasoline prices also have a psychological effect on people with the signs prominently displayed every 1/4 mile as you drive down the typical road in the USA. Whether or not gas prices are a significant line item on their personal P&L statement is a different story, but may affect their decision when it is time to buy a new car or whatever.
The tax cut is helping out here. I actually bought a pair of jeans that wasn’t on sale. Haven’t done that in a decade.
What tax cut ? Oh you mean the one that my household with a healthy six figure income and a decent seven figure net worth – w/ zero debt got ? A whopping whoopdee freaking do da deal whole $180 a month extra ? Gee … be still my beating heart .. that barely covers our internet / cable bill . And I’m guessing you’re getting a whole lot less than that . So give it a rest . The only one’s genuinely benefiting from the ‘ tax cuts ‘ are the upper 1% – .1% like my billionaire neighbor who got a seven figure tax cut because he owns a private jet
While the rich may be getting richer, I am also doing a little better. Anybody with a billionaire neighbor is in the 1%, so stop griping, you sound like a whining liberal.
It’s amazing to me that somebody who says this:
“Oh you mean the one that my household with a healthy six figure income and a decent seven figure net worth – w/ zero debt got ?”
Doesn’t realize he’s better off than 98% of Americans and 100% better off than me and everyone I know…….I’ve been in and out of recession since Q4 2014.
Nancy Pelosi, is that you? No thank you but I will keep my crumbs.
You’re complaining about $180 per month in tax savings? Here in Canada we’ve never seen a tax cut of that magnitude. Ever.
Quit complaining, time to raid the wine cellar….you do have your own wine cellar don’t you? ;)
You need a better accountant or need to restructure your finances to pay less tax.
Second, you’ll never be a billionaire so money envy just doesn’t cut it.
Third, that ‘billionaire’ probably still pays more in tax every year than you own which brings up the some basic math:
In a situation like this the rich will get richer and the ‘poor’ will be a little better off.
A 10% tax cut for a person low income is going to be a lot less than a 7% tax cut, or 5%, or even a 1% cut for a person such as a ‘billionaire’.
And as the person on the lower income levels spends everything they make in order to live, they will not be able to accumulate any assets that would generate income in the future.
That ‘rich guy billionaire’ doesn’t spend everything he makes in order to live and can accumulate excess funds to generate additional income and become richer.
How about that?
And here in Oz the government has a plan to reduce taxes…………it has to be the dumbest plan ever though of in the history of Australia or even any other advanced country in the world.
they want to set the marginal tax rate for someone making A$40,000 the same as someone making A$199,000!
The fact that billionaires exist AT ALL is proof of the corruption of the current system. The greed of the few, will at some point cause the downfall of the entire system. Of course the victims of the system will be the ones blamed when they can no longer tolerate the status quo, and overthrow the elite. But until then, let them eat cake… right?
Ha-Ha! Reminds me of the YUGE $7.00 plus I got in my refund this year!!!!! YEAH!! (Good thing I’m considered a “deadbeat” by the consumer industry and the credit card one….meaning I’m debt free with the exception of my well handled mortgage)
precise tax arithmetic:
I make 94k
I max my 401K (24,500)
My top bracket is 25%
My combined personal/standard deduction was changed to just one deduction but with a total deduction increase of 1600
25% of 1600 is $400.
So I will save a whopping $400 on my taxes but I expect it to increase the inflation tax on my life savings by about 100X – how did you think the cuts would be funded?
I save every dollar I can to try to make up for the resulting extra inflation – but it’s a losing battle.
The tax bills big winners are corporations or, in other words, shareholders, like most of us I imagine.
The personal cuts are mostly temporary and just sugar to get the special cuts Congress wanted.
We all owe tax or our children do for that tax bill.
I own a number of pawn shops in the Phoenix Area. There is no question about it — higher gas prices increase the demand for pawn loans.
People who live paycheck to paycheck get stressed when gas spikes up because their wages don’t jump. It’s real, and it’s been happening — loan demand is (finally) positive again. Demand has been sluggish since 2011 — pawn shops clearly run inverse to the economy.
I’m guessing a lot of your pawn loans are for people driving big pick up trucks? Just a guess.
In the pawn shop I worked at it was mostly the not so well off year round. Some had to take a taxi or bum a ride to get there.
Come winter the construction guys and their pickups would come in.
LOTS of GOOD folks have to rely on the pawn shops. I met tons of very good people while working there.
Also met lots and lots of really bad ones. Thieves.. I HATE thieves. It was a really nice day when I helped put one of them in jail. For me anyway… LOL
The good outnumbered the bad by a VERY LARGE percentage.
WTI really should be up over $100 bpd for shale to be profitable. Even if it reaches that mark it cannot stay there, it’ll crush the economy.
What I worry about is young folks, esp cash-strapped millennials with five-figured student loan debt, high rent, low- wage, part-time or under-employment. The households with low incomes that you speak of, used to be referred to in America as the middle class. I’m not sure you realize those households comprise a significant socio-economic demographic trend in America.
$100 break even? Not even close. Do the research, break even for US shale producers is $30-50 depending on the play.
Then how is it that not one shale company actually makes money selling product? Why is it that stock investment/borrowing is the source of cash flow to keep operations running?
“With oil prices on the upswing, and overall U.S. output projected to exceed 10 million barrels per day (mbd), 2018 should be a banner year for the shale industry. But this expected output boom masks a list of underlying problems that confront the sector. Most companies are still not generating positive cash flow and remain highly dependent on borrowing from the debt markets”
Tesla and Shale have a few things in common and it isn’t products. :-) Hype and debt comes to mind, though.
I have done the research. Outside of the Permian Basin, most US shale plays need $100 + to be profitable to the extent of continued development drilling.
The Permian Basin isn’t all that it’s cracked up to be. Ar ar. Seriously though, it’s takes more rigs to extract the same or less tight oil until one day very soon, it’s over. Now the Inuits that vowed to lay on the land and die before they’d allow Shell tap ANWR, are begging them to come back and tap ANWR. Money talks, you know what else walks.
In 2008 when gasoline went over 4.50 a gallon for premium where I lived in NY I simply parked the car in the driveway and started taking the local bus when I went more than say 50 miles The fare was 1.75 so it really made sense economically and the driver was a good conversationalist I actually made a lot of friends on that bus which was an extra bonus
Hot damn 50 miles on the bus where I am would amount to 2 hours.
A friend of mine takes the bus to his job maybe 10 miles away estimating generously, I never thought I’d see him on the bus but “It’s the same hour by my van or by the bus, it’s their gas, and I can read a book!”.
Move to Melbourne and that hour can become two or more quickly.
Don’t know which is worse: trains that don’t run or roads that get stuffed all the time.
Took the kid 40 minutes in the car to drive 5 klicks last night.
Don’t miss that crap one bit.
This is where higher gas taxes would have benifitted . Higher taxes would have lowered
demand and gas prices in theory would have
dropped. A higher gas tax while lowering
income tax for labor would have been ideal.
US drivers are conservatively subsidized by over $1.00/gallon, if the $125 billion annual cost of deploying its occupation army, air wing and naval battle group in the Middle East is considered. Instead of applying a “national security user fee” to each barrel of oil used, we choose to borrow it from the Chinese, or levy extortionate income tax rates. Let’s apply the true cost of our occupation force to petrol, use it for defense (if it’s really needed, at all) and cut the deficit.
I’d personally welcome $5 or $6/gallon petrol prices, which might then cause buyers to rethink hauling an SUV behind their RVs, or a 60 lb child to school (that they could probably walk to), or suburban Billy Bobs in their RAM/F-150/Cheby pickups that haul little more than themselves.
Higher petrol prices? Bring them on, please!
Nothing subsidizes oil.
Oil is the basic product upon which the entire world runs. It 100% pays for itself. In fact, it is oil that subsidizes (supports) everything else.
The exception to this is shale oil, which is unprofitable and other parts of the economy are being despoiled to pay for it. But that – despoliation, robbing Peter to pay Paul, burning the furniture and floorboards to stay warm – may be an unavoidable feature of the general civilizational decline that we are experiencing now, at the end of the fossil fuel era.
“oil is the basic product upon which the entire world runs”
So maybe it would be a good idea to stop wasting it driving around to buy junk food.
If we taxed gasoline it would discourage the wasteful use of a resource we need to feed ourselves.
I am in the port of Rotterdam at the moment and filled up my rental car
with Euro 95 octane….
Did the liters to gallons and the Euro to the US $ conversion.
Would anybody like to know the price…..
Tatatata…$ 6.30 per gallon!
How about THAT one…
Same here in Turkey Around 6 USD per gallon
$1.50 a gallon here in Egypt. ;)
$6.30 to travel effortlessly 35 miles in a luxurious, padded seat – I call that a bargain, the best you’ll ever have.
With a 2- handle on the price per gallon in most regions of the U.S. for the last 3-4 years, memories of $4.50/gallon in 2008 are in the far-distant past. Thus, sales of 25-30 mpg cars have continued to sink while 15-20 mpg trucks and SUV are off the charts. People have a bad habit of making terrible choices at the most unfortunate times. If gas prices continue to rise, Ford CEO Jim Hackett will get a pink slip for cutting investment in Ford’s car line-up and losing market share to GM, Toyota, Honda, etc.
And they will almost certainly continue to rise Especially with all the beating of war drums in the Middle East
I’ll be ever so contrary here Wolf and lay odds that in combination with the plethora of full size gas sucking pickups and SUV’s now proliferating the American landscape as the US consumer rapidly abandons cars … that even the modest gas prices you’re predicting will have a direct impact on spending as many once again cut down on their recreational and optional driving habits not only decreasing gasoline spending but hotels restaurants resorts etc as well
FYI ; AAA agrees with moi .
And to be honest .. I hope it does … I’m missing having the roads to myself
It’ll change the mix of consumer spending but won’t impact the level of overall consumer spending. All the items you list are part of “consumer spending,” including gasoline, public transportation, etc. They’ll spend more here, and then spend less there. Some industries will be complaining, and others will be laughing all the way to the bank.
Higher-income households will actually just spend a little more rather than cut back on things since the have the financial flexibility to do so.
Lower income households spend every dime they have access to, no matter what the cost of gasoline, but they’ll shift spending around, and they’ll drive less, etc. but the amount of their total spending is determined by how much money they have access to, not by the cost of gasoline.
The price of gasoline shouldn’t affect travel as much as it does in economic terms, except it has a bigger psychological impact because the price is so visible and so scrutinized.
The price of accommodation (motels, etc.) is often a much bigger component of the cost of a trip, yet we never hear about people canceling road trips en masse because of rising motel prices. I’ve noticed accommodation prices going up strongly in recent years, but that’s another story.
Rising oil and gas prices WILL MOST ASSUREDLY impact overall consumer spending….in the long run. Here’s why.
There is no productivity growth in US or western economies. Just the opposite. We seem to continue to generate all kinds of crap that negatively impacts productivity. As such, the economy is a zero sum game. More money spent here, something else is foresaken. So on this point, Wolf, you are correct in stating that overall consumer spending doesn’t change IN THE SHORT RUN.
But in short order, that shifted spending will cost jobs. Sure there may be some additional jobs in oil fracking. But other oil company functions will cruise along just fine whether without hiring. Meanwhile, the spending that went to other things and is now diverted to gas will kill jobs in other industries/sectors. Those people losing jobs will NOT have the same spending power they had before. Therefore, oveall consumer spending will drop over the long haul.
This is what is happening with inflation (both that produced by Fed printing and that produced by oil price increase).
Taken to the extreme….which is coming down the road a bit, as oil becomes more expensive to extract, all of our “cheap oil economy” will wither and consumer spending will be much lower.
People just are not complaining about high gas prices like they
used to. I think raises . lower taxes and gas alternatives are
having a big impact on attitudes regarding high oil prices.
Maybe America doesn’t need to invade someone this time.
And now we get close to 3.1 on the ten year. You can’t spend money you don’t have without consequences.
Higher gas prices may only affect the mix of consumer spending but it strikes a savage blow at consumer psychology. Filling up the tank for $80 instead of $40 just makes you feel poor even if you are not. I can afford the $80 fill up but I notice that even I am finding ways not to go anywhere and generally watching my pennies. Consumer psychology is everything in this economy and once that goes down the toilet it’s all over.
I agree with the psychology part. Wolf, I am not up to date with this, but what will expectation of future inflation do to consumer psychology? Perhaps it will bring spending forward? Just like how deflation expectation will delay spending?
That’s what classic economists think in their ivory tower, but they have been proven wrong on this. People will try to dodge inflation in any way possible, for example by converting their currency to a different currency, buying PMs, stocks, etc. and cut spending because they’re now more worried about accumulating wealth for retirement, given that this gets more difficult in an inflationary environment and requires more savings. Spending more money as your wealth loses purchasing power is not a knee-jerk reaction consumers have.
“Every dime that gets spend on higher gasoline costs is part of retail spending and therefore is part of consumer spending.”
Many states tax gasoline heavily, including where I live, and the tax is a percentage, so people are also paying more in taxes — is this also considered “consumer spending”?
Non consumer debt is 33% higher (4Q 2017) than the high in 2008. Personally I am looking forward to the Feds first quarter consumer debt report that should be out sometime in the next 10 days. Rising CC interest rates, high gas prices and a low savings rate will have a cummulative affect on the country shortly. Maybe not this quarter but certainly by Q3. This party can not last much longer and rising gas prices might give consumers flashbacks to the great recession and cause sudden changes in spending. I am already seeing it in our near retiree friends and those that are retired. “The season” is over in Florida and I expect the pullback to be just begining amongs the 60 and over crowd. My husbands co is already talking about early retirement layoffs.
What is WTI mentioned in the 1st paragraph?
Sorry, it’s the US benchmark grade of crude oil “West Texas Intermediate.” There are many grades of crude oil in the US — such as “West Texas Sour,” or California’s “Buena Vista Hills” and “Midway Sunset.” But for electronic trading and derivatives, WTI is the biggest one.
Those sound like micro-brew beer names.
Yes, there are “sour” beers, all kinds of tastes.
A current fave of mine is called “Death And Taxes” served up at Cafe Stritch, downtown San Jose, it’s a sort of …. sour stout.
I know people who own $45,000 pick up trucks who drive around town looking for .02 per gallon cheaper gas.
The same low math skills that allowed them to buy that truck is in play.
A car may well serve as a home-away-from home.Rich people have country clubs,regular people used to go to the library…
Nowadays all the libraries became day time shelters for the homeless people (all of them with expensive smartphones-which they don’t hesitate to use,warning signs nothwithstanding).
You may pull over and listen to audiobooks for hours.And it is much better to do in a big tall SUV.
Because in a small eco car like Toyota Tercel you sit low,your knees cover your ears and you don’t hear sh…
Currently the personal savings rate is near an all-time low, and CPI is nearly touching it. Historically, when they collide, bad things happened (except when earning growth is sufficiently high to offset the pain, which is definitely not the case yet).
The reason that this results in pain is that the savings rate is the cushion to inflation. When the savings rate = inflation (CPI), there is no cushion. For the past 3 years, the US consumer has whittled his / her cushion down from 5% to about 0.5%.
Looks like you are playing linguistic limbo. It’s a bit like saying a major hurricane won’t affect the city of Houston because there will still be GDP growth rebuilding all of the property that was destroyed.
Texas will no doubt benefit from these higher gas prices, but ultimately U.S. consumers, predominantly lower and middle income consumers are going to be forced to cut back on other purchases, thus cutting into “consumer spending” on things other than fuel.
No “linguistic limbo” (I like that actually). Gasoline is a consumer product like any other. But unlike Chinese stuff, gasoline has a lot of American added value, as the US produces more and more of its own crude and refines it too. $50 spent on gas adds a lot more to the economy than $50 spent on some China-made clothing (imports are a negative in the GDP formula).
Good one Wolf!
Never looked at it THAT way!
Should we not look at marginal contribution instead of averages? E.g. if the total spend on the crude oil we buy from Saudi Arabia goes up by one dollar that’s one dollar taken away from spend on Chinese and US goods.
Of course it won’t cut into consumer spending because it is part of consumer spending. Patently obvious. Where that money is spent does have a significant effect on the economy, though. How much is spent supporting other businesses and how much is removed from the day-to-day economy does matter. The consumer may still be spending it, but if the effect is to shovel the extra into a black hole it is a distinction without a difference.
While South America (Mexico bank troubles, Argentina spiking dollar to peso prices and Brazil huge debt and political and social crisis) seems to be already in trouble, Wolf and others already said we have nothing to worry until 2019… in the US.
I mean Spain and or Italy seem like huge candidates to start the next European crisis. Their banks are like mayflies.
That’s funny because Italy invented Banks as more or less we know them today minus of course, modern tech.
Funny how those “ Black swans” have a way of negating all the best estimates of the so-called experts Carry on Nothing to see here :)
The only really surprise was Brazil. Argentina, Mexico, Spain and Italy are ild news for those who were paying attention. But then again I was aware of the “Mundial” and the ‘Olimpics” effects on the economy of countries who host them, and Brazil had both in short succession.
I think GDP would actually increase with oil production being such a huge part of the US economy especially in certain parts of the country which are no doubt Republican. However, these parts employ many American workers. A oil price spike now would be more than welcome I think for these people compared to the 70s when the US was not as productive in the oil patch. Alaska, Texas, North Dakota, Oklahoma, etc. would see a boon to their economies.
Higher oil prices are always welcome in the oil patch. Price stability and higher prices are very nice. Prices can spike quickly, but stability can only be developed over time. So, don’t expect a lot of new hiring and other increased cash outlays in the short term. Producers will be cautious in ramping up personnel until they believe they see that this price increase has legs.
Japan is one country that actually gains from a higher US$ in that they have massive US$ investments.
Also increasing income from those investments helps fund all those massive Japanese yen liabilities at home.
100 oil will crush subprime even more thats 66% of the economy
While initially quite painful for those with limited incomes, I think higher gas prices might (under a different U.S. political leadership) promote better fuel efficiency standards and an increased interest and use in public transportation. That said, even under previous administrations there hasn’t been much political will to increase the gasoline tax, much less to the levels seen in Europe, etc.
Many states in the US have no problem heavily taxing gas however…
re: “higher gasoline prices don’t change the propensity of Americans to spend. They just change the mix.”
the new mix favors red states like TX,LA, OK, ND & AK over blue states like NY, MA,IL, MI & CA…
convenient that oil rose $10 as Trump’s trashing the Iran deal became apparent, huh?
Wolf, you are 100% right and 100% wrong. You are “right” with respect to the short term big picture macro. Higher gas prices will mean a shift into GDP reflecting more money spent on fuel costs. You are “wrong” with respect to long term big picture micro (and ultimately macro).
Those higher gas prices don’t purchase any additional “product” and divert funds from one segment of the market to another. What I spend extra in higher gas prices, I don’t spend in terms of discretionary spending — eating out, a new outfit, entertainment and so forth. If enough people cut back on discretionary spending, the layoffs and business failures in those other “industries” will begin to mount up. The layoff and business closure cycle will take its toll — sooner or later.
If the governments of the world set the middle East on fire …. I think we are all going to be in a world of hurt on multiple, multiple levels. Perhaps I should have said “when” and not “if”. God help us.
All inflation has the same effect, whether its a consumer product like gasoline, or a consumer product like hair dryers. Gasoline is no different, but the way it has been presented in the media puts it in a different imaginary category. That’s why I wrote this article.
I wrote the opposite article when gasoline prices were plunging in 2015. At the time, the financial media speculated that it would lead to a surge in consumer spending because consumers had all this money left in their pocket, they said. But of course, it didn’t. It led to the slowest year in GDP growth (1.6% in 2016) since the Financial Crisis.
What the author forgets to mention is that higher energy bills prevent rich guys from purchasing bonds ( increase their wealth). Hence higher energy costs are crowding out the bond market. So, higher gasoline means also higher mortgage rates, which have increased 2% from its all time low. It is not only higher interest payments, but already dramatic devaluation of prime properties. And that hurts – especially the rich.