As an economic threat, the $4 gallon of gas is not what it used to be.
There was a burst of media attention this week around the fact that today’s national average price of $3.69 per gallon for unleaded regular is the highest for this time of year since the grim economic days of 2008, as pump prices have edged higher with world oil prices amid violent unrest in Iraq. Yet better average gas mileage, higher wages and a dramatic decline in miles driven since 2008 means a further climb in gas prices probably wouldn’t pinch consumers noticeably unless it reached the new “pain point” of about $4.25 a gallon.
[Of course, in many parts of the country prices already far exceed $4. This analysis is based on national average prices, which are the key to gauging broad economic effects.]
Jack Ablin, chief investment officer of BMO Private Bank in Chicago, attempts to integrate gas prices, fuel efficiency and prevailing wages to compare the impact of gasoline prices on households across the decades. To do so, he calculates how many miles of driving could be “bought” with the national median hourly wage. He estimates that, since the 1970s, gasoline prices have inflicted serious pain on consumers only when the average hourly wage can purchase fewer than 150 miles of driving.
An hour’s work earned less than 150 miles on the road for much of 2007 and 2008, as the recession took hold amid record-high energy costs. From 1979 through 1982 – the classic “oil shock” years – things were considerably worse. At one point around 1980, an hour’s wages typically got you 100 miles (in a far thirstier vehicle) on the road. In the late ‘90s, the oil bust tax cut meant drivers “earned” up to 270 miles in an hour.
As of this week, Ablin figures, “motorists can travel 168 miles” on the gross amount earned through an hour of work. Assuming the median hourly wage today of $20.65 and typical light-vehicle gas mileage of 30 miles per gallon, that 150 mile threshold gas price sits at a national average price of $4.13 a gallon – or about 12% above current prices. This implies the U.S. economy still has a decent cushion against a substantial drag on consumer vitality – especially if recently emerging signs of wage growth carry forward.
The psychological effect
Sure, higher gasoline prices visible at every intersection might have a small psychological effect. A new Yahoo Finance poll asked whether recent increases would lead to curtailed road-trip plans this summer. While 52% said they’d likely stick closer to home, 31% said no, and the remaining 17% would only change plans if prices kept rising from here. But the true picture might be even a bit brighter than Ablin’s analysis suggests.
While his number-crunching work approximates the typical working-and-driving household’s capacity to travel on its paycheck, Americans as a whole are driving significantly less than they have in years. As Doug Short details on his valuable Advisor Perspectives blog, total miles driven as of May were 2.5% below their all-time peak of November 2007, right near that early 2008 period when gasoline prices were cresting.
The reasons for this are varied. While the still-impaired job market has something to do with it, the aging population and emerging preferences for urban living and alternative modes of travel also appear to be involved. Short’s tracking of miles driven, adjusted for the size of the driving-age population, seems to show structural societal changes underway. This is reflected in total domestic gasoline usage. In 2013 Americans burned 6% fewer gallons of the stuff than during the peak consumption year of 2007.
Putting it all together, if the current run rate of gas prices and income implies $4.13 a gallon is a key stress threshold, the reduced national driving habit means the aggregate economic burden from elevated gas prices won’t reach levels comparable to 2007 and 2008 until they hit a national average of at least $4.25 – up another 15%. Let’s call that the true U.S. economic “pain price.”
Viewed another way, when gas prices were around today’s level in 2008, U.S. gross domestic product was $14.5 trillion. Now, the per-gallon price is the same but fewer gallons are being used and the economy is more than 10% larger, at about $16 trillion.
This reduced energy burden should spare the economy much discomfort unless gas prices shoot dramatically higher in a relative hurry from here. This fact helps explain why the U.S. stock market has managed to inch to new all-time highs even as the Middle East noise and rising energy prices began bleeding into the headlines.