Markets & Finance

Can't Stop Guzzling


From Tallahassee to Los Angeles, experts are worried that the price of gasoline is approaching a "breaking point." Any higher, they say, and drivers will curtail their driving sharply. "I believe that another 25? to 50? increase, people would cut back on consumption," a UCLA finance professor tells the Los Angeles Daily News. "It exceeds the psychological barrier."

The date? March, 2000. The price of gasoline back then? Around $1.50 a gallon.

It's something amazing to ponder as you broil in beach traffic this weekend. Gasoline keeps getting more expensive, but Americans keep buying more of it. They bought 10% more gasoline in the first half of 2006 than in the first half of 2000 even though the price at the pump rose 75%. It isn't just essential trips, either—leisure travel remains strong. Gasoline consumption during the week of the Fourth of July holiday this summer was 2% higher than a year ago.

Why the resilience? After all, when prices of most things rise, people buy less. You would think they would react to costlier gasoline by gradually making such adjustments as carpooling, switching to more fuel-efficient vehicles, or even getting a job closer to home. To an extent, they do. Energy Dept. economists say gasoline consumption, driven by an expanding population and economy, would be even higher today if prices hadn't risen.

GLOBAL IMPLICATIONS. But there is a powerful force undermining the conservation trend: Sticker shock doesn't last forever. People are getting used to high gas prices, painful as they are, and continuing with their old ways of doing things. Some are cutting back on spending in other areas, which has chilled non-gasoline retail sales growth. But a reasonably strong economy with a 4.6% unemployment rate seems to be enabling many families to fill the tank with little strain.

"We have consumers that have a lot more disposable income and are less willing to change their driving and purchase habits to accommodate the higher price of gasoline," says John Maples, an operations research analyst for the Energy Dept.'s Energy Information Administration.

That American drivers aren't cutting back, and may not cut back drastically even if prices go higher, has huge implications for the world oil market. That's because U.S. motorists are the single biggest consumers of petroleum in the world. They use more than 9 million barrels of gasoline a day. That's roughly a third more than the consumption of all types of petroleum by every home, car, and factory in China, the nation whose energy consumption gets all the attention these days.

A MOVING TARGET. The resilience of the American motorist helps explain why oil is over $70 a barrel, or more than $50 a barrel above average production costs. Turmoil in the Mideast certainly plays a role. But the seeming immunity of both the supply and demand sides of the global petroleum market to price pressure looms large. On the supply side, oil companies are agonizingly slow to ramp up production to take advantage of the profit opportunity. On the demand side, consumption keeps growing in defiance of rising prices, and a key reason is that America's drivers are pretty near insatiable.

The ceiling on what Americans are willing to pay keeps rising: $3 seems to be the new $2. That's apparent in the monthly Maritz New Vehicle Customer Study, which asks car buyers what they think is an "expensive" price for gasoline. From early 2005 to early 2006, a period when the actual price rose 57¢ a gallon, buyers' definition of "expensive" rose by exactly the same amount—57¢—remaining about a dime above the then-current price.

Buyers' definition of an "acceptable" price went up 37¢. "That says to me that there's habituation, though not complete habituation," says David Ensing, director of research and development for the automotive research group of Fenton (Mo.)-based Maritz.

"THINGS WE NORMALLY DO." There's a myth fed by the news media that Americans are hunkering down and conserving gasoline the way families in World War II planted vegetables in Victory Gardens. More typical is Scott Parker, 36, of Manhattan, who fills up his Nissan XTerra SUV three times a week at around $50 a shot. Parker enjoys road trips on weekends. And although there is a commuter train to Norwalk, Conn., where he works as a marketing director, he prefers to drive. Says Parker: "At the end of the day, I'd rather be on my own schedule." The extra cost of gas goes onto his credit-card balances, which he plans to pay off with his end-of-year bonus. "After I fill it up I'm probably upset for a while, and it passes," he says.

The healthier the finances, the smaller the reaction to costly gasoline. Leonard Mintz, 71, of Norton, Mass., who made his money in the plastics machinery business, just finished an 800-mile trip through the Northeast in his 515-horsepower, bus-size Newell Coach recreational vehicle. Features include heated granite floors, a full-size washer and dryer in the master bathroom, and a tow for his GMC Envoy SUV. Miles per gallon: 6. Concern: zilch. Says Mintz: "We're just doing the things we normally do."

Low- and middle-income families seem to be doing most of the conserving, by necessity. "Our life has changed dramatically," says Jody Kendall, 28, an automotive technician in Mishawaka, Ind. To save gas, he leaves his 2002 Pontiac Bonneville at home and gets a ride to work from his wife, Alison, a waitress. Together they make about $50,000 a year.

Energy Dept. economists estimate that a permanent increase of 10% in the price of crude oil causes a 0.6% decrease in gasoline consumption over two years. The long-term impact is supposedly bigger because people have more time to adjust. But the actual response has been less than that. "We've hardly picked up any sensitivity," says Maples, the Energy Dept. analyst.

HOOKED ON HORSEPOWER. Habits die hard. Highway officials in Maryland and Texas, which compile data on driving speeds, say they see scant evidence of slower driving, even though according to the Energy Dept. every 5 mph you drive above 60 mph is equivalent to paying an extra 20¢ a gallon for gas. Laughs Dinah Martinez, spokeswoman for Houston TranStar, a consortium of transportation agencies: "This is Texas. If we have traffic slowdowns, it's not because they want to. It's because there's a wreck."

Americans aren't ready to end their love affair with cars that go vroom-vroom. Sure, sales of large and luxury SUVs fell 15% in the first half from a year earlier, while sales of compacts rose 8%, according to Edmunds.com. But vehicles of all sizes are getting bigger engines, so there has been no improvement in overall fuel efficiency. On July 17, the Environmental Protection Agency announced that model 2006 cars and light trucks are the fastest and heaviest since 1975. Their average real-world fuel economy is 21 miles per gallon, lower than the 22.1 mpg average of 1987-88, nearly 20 years ago. So much for the idea that energy independence is America's "moral equivalent of war."

If oil shoots to $100 a barrel, consumption could drop noticeably, as it did after Hurricane Katrina last year, when prices rose 46¢ in one week. But if history is any guide, even gas of $4 or $5 a gallon might not force dramatic, lasting changes in American consumption patterns. That breaking point we've been looking for? Maybe there isn't one.


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