Gas Notes

April 2nd, 2012 at 9:17 am

Been meaning to get back to gas prices a bit, just based on a few recent articles and adventures in cable land.

First, there’s this Adam Davidson piece in the NYT magazine this weekend on how high prices at the pump don’t seem to be changing people’s behavior much, because, he suspects, the average household spends only 5% of its income on gas.

I’m not so sure.  First, that’s an average.  Low-income families spend twice that share (see figure here).  Second, while economists have always suspected a pretty inelastic response to gas prices, in this downturn, there’s certainly been a lot less driving going on—see the remarkable break in trend at the end of the series in the last figure here (this started before the recent spike and is thus more a response to the recession and income loss than higher gas prices).  There’s also been a shift to higher mileage vehicles.

Finally, any article about family budgets and gas prices right now should not omit the ongoing payroll tax holiday.  As I’ve written before, that’s really the only thing politicians can do in this case—i.e., they can’t affect the price, but they can give a temporary boost to after-tax income to offset it.

There’s only one thing a president and Congress can do to offset this price spike and they’ve already done it: raise people’s after-tax income.  The payroll tax holiday that the President pushed for and Congress recently extended should put about $120 billion extra in paychecks this year.  Every penny increase at the pump translates into about a $1 billion expense for consumers.  Since its most recent low, the national average is up about 55 cents, or about half the aggregate of the payroll cut (annualized) so far.

So, if these rules of thumb are about right, the government is actually in the process of doing about the only thing it can to help people cope with the current price spike.  Everything else is just noise.

Speaking of noise, the blame-the-President-for-high-gas-prices nonsense seems to have died down a bit, except for on cable TV (more on that in a moment).  I saw a poll—and I’ve seen this result a number of times—that had a majority of respondents answering “no” to “do you think the president controls the price of gas?” and yet also had a majority answering “yes” to “do you blame him for high gas prices?”  So, we suffer some cognitive dissonance of the issue.

Re public opinion, I found this interesting: I was driving around with a bunch of kids this weekend and they noticed that gas here in northern VA just broke $4 a gallon.  I mentioned that some people blame the President for the price spike.  The younger kids—around 10—just couldn’t make any sense out of that.  I tried to explain but they just didn’t get it.  To them it was like accusing the President of not being able to fly; like good economists they essentially argued that he can no more set the price of gas than the price of the movie we just saw (Mirror-Mirror with Julia Roberts—she’s great in it, the kids loved the movie—I thought it dragged).

The older kids –12-13—agreed with the economics but recognized that, as one precocious kid put it, “that’s just a talking point.”  So, somewhere between 10 and 12, kids go from simple economics to political economics.

Next, I hear a lot of excitement about drilling and fracking for natural gas.  And it’s true–all that extraction has been increasing the supply and lowering the price of this energy source relative to oil.  But people forget this important fact: for every $10 of energy we consume, $9 goes to oil-based products (see figure).  We just don’t have the infrastructure in place yet to take advantage of this price difference, so you won’t see this show up at the pump much either.

Finally, there’s a meme on cable among conservative talking heads that got a test last week.  I’ve asked them “exactly what do you think the President could do?” beyond the pretty aggressive extraction he’s already presiding over (described here).

One answer I’ve gotten back: he just needs to talk about his support for building out the logistics infrastructure, i.e., the pipelines that move oil around the country.  That, I was told explicitly, would move the price right away.

Well, on Thursday (3/22), President Obama visited Cushing, Oklahoma, a bottleneck point in our national pipeline infrastructure between North Dakota and the refineries in the Gulf.  He stated that he is “directing my administration to cut through the red tape, break through the bureaucratic hurdles and make this project [building out part of the Keystone pipeline from Cushing to the Gulf] a priority, to go ahead and get it done.”

So, what happen at the pump?  Nothing.   The figure below shows daily average prices with a line on the day of the speech.  Bernanke can say stuff that moves interest rates.  Prominent market types can move stock prices.  World events can move oil prices.  But Presidents simply can’t move gas prices.

Yes, I know…evidence isn’t relevant here.  In fact, any 12-year old knows that.  It’s the grownups that get confused.


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7 comments in reply to "Gas Notes"

  1. thearmotrader says:

    Hey Jared, here’s a post I did a month or two ago that shows Gas Expenditures as a percent of the PCE.

    It shows Gas expenditures are at about 4% of PCE, not 5% like the article stated (also depends on what stat was used). Although he could be mean 5% of income which COULD be different from expenditures.

    While 4% is not abnormally high (and definitely not the 6% like we had in the late 70s/early 80s), it still is a decent chunk that effects people psychologically, even though total energy expenditures have fallen (as shown in my post).

    I agree with you though that poorer/lower class households spend a bigger % of their expenditures.

    Good post by the way. Thanks.

  2. davesnyd says:

    A little harsh, don’t you think? Nathan Lane is always fun to watch and while I didn’t laugh as hard as my nine year old at the dwarf-on-dwarf slapstick, it was still pretty funny.

  3. Th says:

    On the other hand, Georgia Power is cutting electricity rates due to lower generating costs from natural gas:

  4. Th says:

    My usual reply on gas prices though is that President Obama could do what we did the last time gas prices passed $4: blow up the world’s economy thereby crashing demand and prices. I then ask, “What were you advising Bush to do in 2008?”

  5. Altoid says:

    This is a serious question I’ve asked in a lot of places and have yet to get an answer to. Just how is it decided what prices get posted at our gas stations? Clearly these are not independent decisions by independent retailers, or even independent decisions by chain station operators, or even independent decisions by wholesalers, based on competitive conditions. They’re decisions made by humans, for human reasons. How do they get made? Can anyone point to a reasonable discussion of this?

      • Altoid says:

        Thanks, Jared. Interesting article, but it only goes up one rung and leaves things unanswered at that level: If I’m one of the wholesalers referenced, how do I decide what to charge?

        What I’m really getting at is stories I vaguely remember over several years saying that ultimately the retail chain tries to set prices at a level that will move a particular quantity of gas in a given time frame. In other words, that it’s really more about maintaining flow rate than anything else. If that’s the case, having more refineries actually operating right now, as opposed to being shut down for various reasons, might give us significantly lower prices. This is of course a primarily “visible hand” argument, as opposed to a primarily “market forces” argument.