Energy

Gas Prices: How Real Is the Damage?


Increase in U.S. gas prices this year: 15 percent

Photograph by Joe Raedle/Getty Images

Increase in U.S. gas prices this year: 15 percent

Gasoline prices in the U.S. have jumped 50¢ a gallon, to an average of $3.77, this year, and in much of the country it’s tough to fill up even a small car for less than $50. The increase has pushed the issue to the front of the political debate, but how much do gas prices really affect a $15 trillion economy? The short answer: quite a bit, though probably less than we imagine.

That’s because buying gas is unlike any other purchase. It’s sold only in stores (gas stations) whose primary purpose is selling gasoline. Even when gas is cheap, we’re well aware of the cost because we see the pennies spinning by on the pump, says Dan Ariely, an economics professor at Duke University. And these days, they’re spinning ever faster. By contrast, when the electric bill arrives in the mail, it doesn’t hit as hard. “Imagine if every night I came up with a tanker and filled your car and three months later gave you a bill,” Ariely says. “Would you really know how much it costs?” With gas, consumers feel “the pain of paying when we see the specific cost … and we feel much worse about it.”

Gas prices are especially conspicuous—posted in two-foot-high letters on thousands of street corners, so virtually everyone who drives can see prices increasing. “People tend to respond to things in a comparative fashion,” says George Loewenstein, a behavioral economist at Carnegie Mellon University in Pittsburgh. “The salient comparison for gas prices is what they were in the recent past, not the real price historically.” When we do think about the past, he says, we remember that gas was cheaper but don’t recall that our salaries were smaller, too.

With the national average quite possibly headed past $4 in the next month or two, the increase might spur many to put off driving to Florida for spring break. But since we perceive changes in gas prices more acutely than their actual level, Loewenstein says, if prices settle around $4, drivers will grow numb to the pain of $50-plus fill-ups and pack the SUV for that trip to the Cape this summer.

While the economic effect of higher gas prices is substantial, the jump won’t necessarily inflict long-term harm. Credit Suisse (CS) estimates that each 1¢ uptick in a gallon of gas redirects $1 billion of consumer spending away from other goods over the course of a year. Retail sales in 2012 will probably total $4.8 trillion; so a 50¢ jump would siphon away more than 1 percent of those dollars—$50 billion—that might otherwise have gone to Wal-Mart Stores (WMT), Gap (GPS), or McDonald’s (MCD). Still, “we have to go well above the $4-a-gallon threshold before you really start to feel the pain,” says John Lonski, an economist with Moody’s Analytics.

Those who have little choice but to get behind the wheel are already hurting. Most Americans drive to work or the supermarket, and few have any reasonable alternative, says Samara Gunter, an economics professor at Colby College in Waterville, Me. “When other prices change, we can shift to different goods,” she says. “It’s really hard to adjust how much we drive.” And the poorest Americans, for whom gas makes up a far larger share of the household budget, will be hardest hit, she says. Eventually people can move closer to their jobs or get a more fuel-efficient car, Gunter says, “but that takes time.”

The bottom line: As gas approaches $4, it will likely cut spending on other goods, but the psychological effect may be greater than the economic impact.

Ghost_image
Rocks is an editor-at-large for Bloomberg News in Berlin.

Steve Ballmer, Power Forward
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • CS
    (Credit Suisse Group AG)
    • $26.01 USD
    • -0.26
    • -1.0%
  • WMT
    (Wal-Mart Stores Inc)
    • $76.03 USD
    • 0.01
    • 0.01%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus