Oil prices have exceeded $50/barrel, growing 27% since January’s average. In response, the price of gasoline faced by households increased; and when real consumer spending fell at a 4.3% annualized rate in Q4 2008, the rising price of gasoline can be an ominous sign for consumer spending on energy goods.
However, there appears to be a breaking point in gasoline prices that is well-above its current level, $2.10 on 3/30/09, only after which real personal consumption of energy falls as gas prices rise. Before that point, consumers are rather resilient to rising gasoline prices.
The chart below illustrates monthly gasoline prices and real personal spending on energy and services, as measured by the Energy Information Administration and the Bureau of Economic Analysis. There is a nonlinear relationship between the two that peaks around $3/gallon. This means that on average, spending on energy and services – roughly 4% of total real personal spending (RPCE) in February 2009 – rises in response price increases below roughly $3/gallon and falls in response to price increases above $3/gallon.
The nonlinear relationship (the regression equation in the chart) indicates that it would take a jump to about $3.35/gallon to reduce real spending on energy and services below its current level in February 2009 ($341.8 billion).
The regression line has an R^2 = 0.54, which is admittedly weak; but since the price of gasoline has rarely been above $3/gallon, I take this to be a rather good fit. It does suggest, though, that there are factors other than the price of gas that impact real spending on energy and services. But nevertheless, the chart tells us that consumers are unlikely to cut back sharply in response to the 10% bump in gas prices since January.
Originally published at the News N Economics blog and reproduced here with the author’s permission.
Edwin G. Dolan is an economist and educator with a Ph.D. from Yale University. Early in his career, he was a member of the economics faculty at Dartmouth College, the University of Chicago, and George Mason University. From 1990 to 2001, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program. Since 2001, he has taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga, where he has an ongoing annual visiting appointment. During breaks in his teaching career, he worked in Washington, D.C. as an economist for the Antitrust Division of the Department of Justice and as a regulatory analyst for the Interstate Commerce Commission, and later served a stint in Almaty as an adviser to the National Bank of Kazakhstan. When not lecturing abroad, he makes his home in Washington's San Juan Islands.
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