June 19, 2008 9:00AM
Real Impact of Gas Prices on Economy?
By Brian Sullivan
-
Share:
The big question asked by economists these days is simple: how much will the jump in gas prices impact consumer spending and thus the American economy?
Daily we hear estimates, varying from “some” to “very much.” It got me thinking about the math behind the numbers. Certainly the higher price of gas is hitting many families hard. However, based on some standard figures for miles driven and mpg statistics, the real size of the figures are not as bad as perhaps we think, and there may be ways to help manage through these increases.
If you drive 12,000 miles per year (the average lease term) and your car gets 25 miles per gallon, you use 480 gallons of gas per year, or 40 gallons per month. At a national average price of around $4.10/gallon the average American driver will spend roughtly $164 per month on gas. That’s $84 per month more than what they spent with gas at the now bargain basement price of $2.10/gallon. Clearly the cost is higher for two-driver families, though they would also presumably enjoy the benefits of two salaries.
I know that an extra $84 per month can really hit some family budgets. Ialso understand my gasoline analysis leaves out the economic impact of higher food prices, medical costs and other inflationary factors we deal with daily. My point is that perhaps we need to focus less just on gasoline, and more on ways to help with the other cost increases we face. Ones we may be able to greater control.
Yesterday the President discussed a proposal to increase oil supplies via drilling more offshore, in the Arctic and by extracting oil from shale. The discussion of whether this will bring down prices is for another day, as this is the 10-plus year plan and oil’s non-reaction to the news indicates no one believes these moves (if they happen) will help in the near-term.
What can we do then to perhaps help the sting of higher gas prices?
Think of credit card debt. If you owe $6,000 on credit cards with an average APR of 18%, you are paying roughly $1,080 per year in interest. Thats $90 per month. You should call your credit card company and try to negotiate a lower rate. The card companies are struggling now just as many other creditors and may be willing to lower your rate rather than lose you to a new, 0% APR card. If you can negotiate your rate down just 5% to 13% APR, you would save $25/month on that same balance.
I recently received an offer from Discover Card to transfer balances for 1.99% APR for the life of the balance transfer (so long as I dont pay even a day late, at which time the APR goes up - be careful of that). With a similar offer, the $6,000 balance now becomes roughly just $120 per year in interest, or $10 per month.
You have just taken your previous $90 per month credit card minimum payment down to $10 dollars, saving $80. The net result? A near elimination of the extra $84 per month you are paying for gasoline.
I know somewhere Fox Business’ Dave Ramsey is squirming, as he smartly advocates having no credit cards and thus paying zero per month in interest. That’s clearly the best policy, and if you can do it it would even greater mitigate the impact of high gas prices. I’m merely saying that while there is very little each of us can do to bring down the global run in gas prices, there may be ways to impact individual economic behavior to at least help reduce some of the sting.
I know this is an incredibly simplistic analysis. My point though in doing the math on these figures is simply to remind consumer that it is easy to focus on what we see more often (filling up with gas a few times per week) than what we don’t see often (the monthly credit card bill that likely comes via email) but its no less important to try to adjust the infrequent costs.
-
Share:
I’ve been toiling over quite sometime about what to do with these ridiculous fuel price spikes which seem to take place every week or even daily now. I can’t sell my car, since it’s how I make my living, so I took a chance and purchased a water kit for my car online from Water4Fuel.info
My mpg’s have gone from 26mpg up to 39mpg and it took me about 45 minutes to install it in my car. So far, so good…I’m only visiting the gas station two times per month now!
Your math is accurate for the given situation, but I doubt if your example is truly representative. From my personal experience, which represents two adult drivers and a teenage driver in the family, my monthy gasoline budget has been severely busted. My wife drives approximately 500 miles per week, I do approximately 350 miles and the teenager does 50 miles. These are work related miles … not pleasure driving. The only positive is that my car averages 28 mpg, the wife’s averages 24 mpg and the teen’s is well over 30 mpg.
All in all, the current price of fuel has hammered my discretionary budget. Considerably less “going out” for meals, etc. When I do go, I see the establishments are noteably less crowed.
Not only is your math way off, your leaving out the domino effect that anything negative on the economy has. Most people are driving in the city which means even the small economy size car that we all wish we had now will still only get roughly 20 miles to the gallon. If you multiply that by not 12,000 a year but by a more realistic average of 15,000 a year you will see that we are spending around 210.00 more a month {per vehicle}. Now you figure in all the other rising costs in our economy and you will quickly come to the same conclusion that millions of Americans have come to. NO MORE EXTRA MONEY FOR DINING, OR ENTERTAINMENT. And it is here where we really take the biggest blow, now we see businesses closing and more and more jobs are lost and thus contributing even more to our weakening economy.
Sir
Your numbers are “WAY OFF”. That’s what the media doesnt understand. Your numbers?
Double that….Most families use 2 cars because there is 2 incomes so double that.
Now ur getting a more accurater picture. 75% of the country cant used public
transportation. Where have you people been?
The problem I see with your “math” is assuming 25 mpg. More than half the population are driving large suv’s and pickups. These vehicles get around 12 mpg city, wich where I live is the only type of driving possible because of heavy traffic. A person driving 16000 miles per year getting 12 mpg would spend an additional $233.00 per month at $4.20 per gallon compared to $2.10.
Mr Sullivan,
Your most obvious point is simply that the differential in what we are spending in gas now versus what we were spending last year is marginal. It is not the actual dollars spent that is the real problem, it is the psychological effect created by seeing $4 a gallon on every street corner and at every exit. Constant reminders of this situation make the average person tense up and spend less. If we were not in a consumer based economy this would not be that big of a deal, however we are and everyone needs to understand that this is just how it is going to be. Budget yourselves wisely and also use a little common sense conservation and we all will adjust.
Great Blog by the way, I’m a big fan!
Chiefos McStacy
My wife and I have had this conversation for over a year now about how high will gas prices need to get before the american consumer gets fed up with the environmentalists and tells them to take a hike and we begin drilling everywhere we can find oil, we begin building more refineries, and nuclear power plants. The common answer was probably over $4.00 per gallon. I am still amazed at how many people still believe that drilling is NOT a good idea and that we need to continue paying people who don’t like us for a product we so desparately need. I also wonder how long it will be before we begin giving insentives to develop hydrogen fuel-cell cars. My theory is that when not if we develop a vehicle that will run on hydrogen and get off the oil, what will the arabs do with all of that oil because you can’t eat it and if there is no need for it, what are they going to do. They can’t grow anything over there either. Just a thought.
Drill for more oil? We export most of the oil we produce now. Do the jokers in washington have a deal with the oil companys to make even more money? Why dont they stop the export of oil in this country.If we take the free food,transpotation,haircuts,healthcare,ect away from are so called friends in washington,they can see 1st hand what it is like to live on a budget!!
I read this as an elitist commentary.
There are obviously some missing details.
All demand does not come from the USA! Gasp!! Workers in India and China are experiencing a middle class life and want the things we associate with the change in lifestyle. Look at pictures and films of large cities today and compare them with pictures from a decade ago. A significant increase in cars.
We are dependent on a group of not very friendly foreign governments for our supplies.
Why is it acceptable to blame the oil companies who do not produce all of the oil consumed for their 8.7% profit margins and not blame the hedge funds and their 82% profit margins made partially by purchasing gas futures? Oh I forgot Al Gore owns one.
Why do we not want to be independent of foreign control and keep our dollars in this country? We could significantly increase charitable activities without an increase in taxes.
We experienced the effects of higher taxes and rationing in the era of President Carter. We need a comprehensive energy policy. One where everyone’s ox is gored a little. We have been NIMBY’s for far too long. It seems that the risk of poisoning people, birds and animals in other countries is perfectly acceptable as long as we don’t have to see or experience it. Talk about the ugly American.
And finally we have our politicians pandering to as many groups as possible to maintain their elite position with absolutely no understanding of the interaction between energy, food, manufacturing and the movement of goods to market.
It is evident that a failure to learn from past mistakes dooms us to repeat them on a much larger scale.
Freedom, self reliance and personal responsibility should be the watchwords for the American public!!
“I know somewhere Fox Business’ Dave Ramsey is squirming, as he smartly advocates having no credit cards and thus paying zero per month in interest.”
Good old Dave neglects to take into account the 1% to 6% or more that I’m saving by using a credit card. My expenses would be higher without them. Also, with no credit cards, it’s pretty difficult to get a good rate on a mortgage, so your mortgage payment will be higher, if you can even get a house, and if you have any unforeseen difficulties, credit cards can be a life saver.
The best book of help you’ll ever read in this time of high gas prices: “HOW TO LIVE WELL WITHOUT OWNING A CAR” by Chris Balish.
brian:
your blog overlooks one important impact of rising fuel prices. everything we buy at the store requires fuel to get it there. everything, food, electronics, etc. the pain at the pump is only a small part of the equation. i wish the fed & congress would raise interest rates & restrain spending, respectively. the loss of value in our fiat dollars seems to be ultimate cause of this mess.
Interesting points. We are a two car family, don’t have debt, cell phones, etc., but I work part-time and it is at the point where gasoline is taking almost 11% of my after-tax income. There isn’t much left to cut. We rarely go out to eat, drive fuel efficient used cars, etc, which are paid for with cash. I am concerned when I hear talk about higher taxes, as already a good 28% goes to city, state and federal taxes -and this does not include property taxes, sales taxes, etc.
I think you make a giant leap of faith in assuming that two-driver families have two incomes. It is already a financial struggle in our household to have one parent home raising children in order to ensure they become good, productive members of society. When gas prices (and consequently everything else that has to be moved) skyrocket, our one-income and two-driver family suffers severely.
Further, your example about credit cards is valid, if you haven’t already been smart and not run up debt that you can not afford to pay. In our household we have zero credit card debt, by choice. This is representative of the way we live, within our means. So to say that there are other ways to limit spending assumes that one has not been as repsonsible as they can to begin with, which isn’t always the case.
The point is that there are a lot of people like us who have done all the right things to begin with, and are now hurting. I think it is naive to say that rising fuel costs aren’t going to have a serious impact on the broader economy. I know that our discretionary spending has dropped substantially due to the higher costs of many necessary items, and I suspect we are not alone.
I am cutting back on cell phone bills,as in not signing a new term.
Also I’m cutting down on Direct T.V. channels. I make under 40,000
and gas money is taking over our daily choices.
Conservation is important. Mass transit is important. But drill here and drill now is more important:
As long as the industrialized world was successful in transferring work from human energy to fossil energy, the ability of one person to produce more goods increased. Increased productivity permitted higher wages and cheaper goods. Capital was readily available at reasonable cost and our gross national product rose. ( from pg. 98 The Next economy by Paul Hawken @1983 )
The extent to which energy nourished the United States’ growing standard of living is reflected in our consumption of 35 percent of the worlds fuel, although we are only 6 percent of the world’s people. Total energy consumption increased 104 percent from 1946 to 1970 while the United States’ population increased only 42 percent and the United States’ real Gross National Product (GNP) increased 131 percent. ( from pgs. 9,10,11 The New State Of The Economy by Fred C. Alvine and Fred A. Tarpley Jr. @1977 paper-back )