Gas Prices, Consumption, And Why The Average American Is Being Left Behind

The summer driving season is upon us. For many, that means vacations, barbeques, and of course, higher gas prices. For 23 out of the last 35 years, gas prices have risen an average of 14.7% from one summer to the next, while 12 decline years have only averaged -8.1%. Prices tend to be highest in June for any given year, with some years’ prices spiking in late May or early July. Retail gasoline prices are at their highest levels since 1980, in real dollars. But as we have uncomfortably noted previously, Americans have not returned to pre-crisis consumption patterns yet, despite all the chatter of recovery. So far in 2013, in fact, we have consumed 14 million fewer gallons of motor gasoline than in 2012, and nearly 55 million less than we did at the peak in 2007. But, as ConvergEx’s Nick Colas notes, we aren’t necessarily “cutting back”, as this data suggests: the Consumer Expenditure Survey shows that Americans spent nearly $700 more on gas in 2011 as compared to 2010, the two latest data sets available. What does appear to happening, though, is that Americans are restructuring their spending as healthcare, lodging, and overall taxes take a larger chunk out of every paycheck. Another explanation is fewer commuters to buy gasoline based on a still-high unemployment rate. Basically, we’re not necessarily consuming less ‘on purpose’: we’re just adjusting to a “New Normal” way of spending. What the data shows is a disconnect between the life of the average worker and the energy market: we assume that strength in the latter goes hand-in-hand with strength in the former. Unfortunately, the average American is being left behind: they’re still struggling.



Via ConvergEx’s Nick Colas:

Get Your Kicks On Route Sixty-Six

Every summer my family makes several trips down to our favorite vacation spot in Ocean City, New Jersey, a small beach town in South Jersey which calls itself “America’s Greatest Family Resort”. And while we always enjoy the beaches, the boardwalk, and the restaurants the town has to offer, perhaps the most iconic moment of each trip happens halfway down Route 206 in Hammonton, NJ: a town my family and I have dubbed “America’s Cheapest Gas Town”. Every trip, without fail, Hammonton gas stations seem to have the cheapest prices on our cross-state trek – it’s even the same price for cash or credit. Needless to say, we fill up the tank in this town every time.

Part of the draw to the Hammonton stations, of course, is the fact that most of our trips to the Shore happen over the summer, when gas prices are typically higher than at any other time of the year. Based on the Energy Information Administration’s (spell out this first mention) Energy Outlook data, summer months are far and away the priciest of the year in terms of retail gasoline, sometimes costing more than 30% more than gasoline sold just a few months earlier. A few other observations from the data:

  • May and June have been the most expensive months to buy retail gasoline since the late 1970s, while February has never had the “honor” of being the priciest month. According to the weekly data, moreover, it is the latter part of May and the early part of June that have been the most expensive over the past few years – meaning we’re passing through the worst of it right as we speak (er, write).
  • Summer gas has increased by an average of 10.5% each year over comparable winter prices, but prices only go down by about -3.8% from each summer to the next winter. January and February are typically the cheapest months of the year.
  • If you drive a diesel car, there’s good and bad news: prices here tend to be less volatile (though still higher over the summer), increasing an average of 3.5% from winter to summer, but they also go up from summer to winter – an average of 2.8%. So while there may not be any surprises in terms of price, it’s only because you always know the price is slowly ticking up.

Luckily – if you can call it that – the summer of 2013 is expected to give drivers some relief at the pump: the EIA predicts that retail gasoline prices will fall by about -1.1% compared to last year, which were already -2.5% lower than in 2011. But it’s still not going to be cheap: the average gas price from June-August is forecast at $3.53 per gallon, only $0.40 lower than the 2008 summer average high of $3.97 and the sixth-highest summer price (in real terms) in the EIA’s data history.

Obviously, that means that driving this summer is going to be a costly endeavor. The average passenger car on the road today gets 17.1 mpg, according to the Department of Transportation; assuming an average 20-gallon tank, the average car today could go just under 350 miles before refueling. And it’ll cost about $80 to do so.

While summer road trips certainly aren’t as cheap as they were 10 years ago, the good news is that retail gasoline prices are slowly trending down this summer; the EIA expects us to be paying $3.30 per gallon at the end of the year, and even less in 2014. That’s good news for anyone driving for vacation or just driving to work: the “pain at the pump” will be slightly less painful – and based on historical consumption data from the EIA, typically periods of lower prices correspond to higher consumption.

Interestingly, though, despite lower prices since 2008, Americans still have not climbed back to pre-recession consumption patterns. A few data points from the EIA’s database show the irregularity:

  • We drained more than 812 million barrels of motor fuel in the first three months of 2007, the latest high; in 2013, we’ve only guzzled 757 million. This consumption level is also 14 million barrels less than 2012.
  • Distillate fuel oil – usually used for heating in residential, commercial, or industrial “end users” – and kerosene follow the same trend. Total distillate fuel sales have gone down by nearly 6 billion gallons since peaking in 2007: kerosene usage has dropped -77% since 2006, when it peaked at 823 billion gallons.
  • Aviation gasoline has fallen from 150,900 gallons/day in 2009 to just 101,000 in 2012; jet fuel (kerosene type) has also dropped from a high of about 40 million to 33 million gallons per day, likely because of airline consolidation. Propane, meanwhile, has increased from just 3,300 gallons to more than 5,500 gallons per day.

But while these trends are an anomaly in terms of historical US consumption – meaning, we typically return to higher consumption during a “recovery” – they are not unexplainable. There are several factors, in fact, that might explain lower consumption, and it’s not just consumer deleveraging or readjustment of living standards. Even more efficient cars are an unlikely explanation, as new vehicle sales have only hit between the 12-15 million mark in the last few years. Most, actually, have to do with a disconnect between a “recovery”, i.e. lower prices, in the energy market, and economic realities for consumers:

  • Prices. Yes, retail gasoline prices are dropping around the country, and logically we might think people would accordingly go back to their previous consumption patterns. But gas is still expensive to the average consumer. The average car travels 15,000 miles per year: at an average of 20 MPG and $3.53 gas price, that means they’re paying $2,650 a year just to drive. With a median income of just over $50,000, the average American is spending 5.3% of their income on gasoline. Even with slightly lower prices, that’s still a big chunk that most are happy to cut back on.
  • According to the Consumer Expenditure Survey, moreover, Americans are actually spending more money on gasoline, despite lower prices. In 2011, the latest data available, we spent almost $3,500 per person, compared to almost $2,800 per person in 2010. Fuel oil has also cost us more, up to $198 in 2011 from $176 in 2010. 2009 spending on gasoline was $2,500. Even lower consumption doesn’t mean lower spending, then.
  • Unemployment. Fact is, most of America drives to work: about 70%. When 7.5% of the population is unemployed, that means about 8.2 million people aren’t driving to work. If they each drove the average 15,000 miles every day, they’d be consuming 750 gallons each, or 6.1 million total. They still drive, of course – but their mileage, and therefore fuel consumption, is probably cut by about half. Even some of those who are employed may be driving less than they used to as they try to find part-time jobs closer to home, which may bring the total “loss” of consumption even higher. This doesn’t fully account for the drop in consumption, but it’s certainly a massive contributor.
  • Other spending. As we all know, the increase in the payroll tax this year has set some of us back as disposable income goes down. But even before the 2013 increase, costs for healthcare, education, and various other staple purchases have been rapidly increasing, creating an even bigger drain on what’s left of the paycheck. Workers around the country are probably trying to adapt to this change, and one of the first changes they might make is lower gas consumption.
  • New patterns. While this is probably the factor with the least impact, it’s likely that any tactics used to save gas during the recession are still in place: carpools might still be intact, biking to work may have become an enjoyable pastime, and telecommuting is more popular than ever. If American workers have become comfortable with these patterns – and they very well might be, if it’s saving them money – they might be unlikely to change in the future. And as more people join in on these tactics, consumption will likely go down too.

Even all of these factors together can’t fully explain the drop in fuel consumption in the US, but they are all contributors to the pattern – which seems unlikely to change in the near future. Americans weaning themselves off of oil is not necessarily a bad thing: the average household can save more to spend on other necessary purchases, or pay off debts. What’s important to note is that the anomaly of not returning to prior consumption patterns is not a problem, nor is it necessarily strange. What it shows is a disconnect between the life of the average worker and the energy market: we assume that strength in the latter goes hand-in-hand with strength in the former. Unfortunately, the average American is being left behind: they’re still struggling, even while energy will hopefully become cheaper.


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