Monday, April 6, 2009

Are rising gas prices bad for consumption numbers? Or not

Oil prices have exceeded $50/barrel, growing 27% since January's average. In response, the price of gasoline faced by households increased; and when real consumer spending fell at a 4.3% annualized rate in Q4 2008, the rising price of gasoline can be an ominous sign for consumer spending on energy goods.

However, there appears to be a breaking point in gasoline prices that is well-above its current level, $2.10 on 3/30/09, only after which real personal consumption of energy falls as gas prices rise. Before that point, consumers are rather resilient to rising gasoline prices.

The chart below illustrates monthly gasoline prices and real personal spending on energy and services, as measured by the Energy Information Administration and the Bureau of Economic Analysis. There is a nonlinear relationship between the two that peaks around $3/gallon. This means that on average, spending on energy and services - roughly 4% of total real personal spending (RPCE) in February 2009 - rises in response price increases below roughly $3/gallon and falls in response to price increases above $3/gallon.

The nonlinear relationship (the regression equation in the chart) indicates that it would take a jump to about $3.35/gallon to reduce real spending on energy and services below its current level in February 2009 ($341.8 billion).

The regression line has an R^2 = 0.54, which is admittedly weak; but since the price of gasoline has rarely been above $3/gallon, I take this to be a rather good fit. It does suggest, though, that there are factors other than the price of gas that impact real spending on energy and services. But nevertheless, the chart tells us that consumers are unlikely to cut back sharply in response to the 10% bump in gas prices since January.

Rebecca Wilder


  1. The U.S. will never extract itself from an increasing and vicious level of stagflation.

    The U.S. will experience a long-term deterioration in our standard of living for the majority of people in this country.

    The U.S. will be forced into a high degree of economic isolation; will require that we operate; under a “command” economy; where we will drift into an increasingly totalitarian mold.

  2. Does your data disaggregate transportation fuels from other energy costs?

    Just eyeballing the VMT charts I put together based on your example some time ago leads me to think the breaking point--for both gasoline AND diesel--is about $2.50-2.75/gallon ($105-$115.50/barrel @ $10 crack ~ $95-105/barrel light sweet crude.)

  3. Does your data disaggregate transportation fuels from other energy costs?

    Hi Freude Bud,

    No. It includes all energy uses, of which “gasoline, fuel oil, and other energy goods” is about 56%. The number I use also includes “gasoline and oil” (which is presumably home-use) and the associated costs to service electricity and gas. I wanted to look at the overall aggregate effect on energy usage when energy prices fluctuate, and the gasoline price acts more as a proxy to all energy prices. The R^2 fell if I used oil in its place.

    If I put the category titled “gasoline, fuel oil, and other energy goods”, the break point is between $2.50-$3.00/gallon. I remember your analysis, you used vehicle miles driven – you had some nice charts.

    Thanks for stopping by! Rebecca