Courtesy of Doug Short.
The price of gasoline has made the headlines many times in recent weeks. The theme that goes with the headlines is generally the same: Gasoline has never been more expensive for this time of year, and the rise in price will deliver a blow to disposable income that can set back our recovery. But the impact of high gasoline prices is a lot more complicated than that, and often the analysts haven’t factored in the offsetting drop in the price of natural gas.
The price of gasoline does seem to impact consumer confidence, as we see here:
This chart shows the wholesale price of gasoline in blue, overlaid with a graph of the University of Michigan Consumer Confidence Index. As we see, the rapid rise in gasoline prices began to weigh on consumer confidence during 2007, prior to the full impact of the financial crisis. The rise in gasoline dragged down confidence until the price peaked in 2008 and reversed. The reversal led to an uptick in confidence in the second half of 2008 (to the 70 level), until the financial crisis came to a head and brought confidence down, along with the price of gasoline.
Beginning in 2009, gasoline and consumer confidence have been moving in lockstep, despite the gradual divergence in 2011. This is not particularly mysterious since the two have risen together with an improving economy. We do see that the rise above $3.00 in 2011 did seem to weigh on confidence, although the European banking crisis and weak stock markets certainly played a role. More recently, with crude oil rising more than 10% this month alone to over $110 per barrel, financial circles have been fretting that this rise will derail our recovery.
This past Friday, however, the most recent University of Michigan Consumer Confidence number was released, coming in at 75.3. This number bettered the 73.0 that was expected among a survey of economists, and was significantly higher than last month’s 72.5. This rise can be partially explained by the recent stock market rally, but what about the impact of gasoline?
Consumer confidence depends largely upon disposable income, and a household’s energy bill is made up of more than just gasoline. It also depends on natural gas and electricity. In fact, the cost of natural gas has fallen much more dramatically than the rise of gasoline, and this drop explains why consumer confidence has remained firm. People are paying more for gasoline, but less to heat their homes and run their kitchens.
Let’s run a little experiment. It’s not going to be highly scientific, and it may not pass the muster of readers who are energy experts, but we could take away something useful from it nonetheless. Rather than follow the simple price of gasoline or natural gas, we’ll look at the pair as a total household expenditure. We’ll consider the two from a wholesale cost perspective, and for purposes of the exercise we’ll omit the cost of electricity and any other forms of energy.
We’ll assume a simple household with one home’s worth of natural gas, and two drivers. According to this EIA study, US natural gas consumption has been trending downward slightly over the years, albeit in a fairly volatile manner. The average household in 2009 used 74,000 cubic feet of NG, or about 76 mm Btu. In other words, on a wholesale basis, the average household is using 76 * $2.70 or about $205.20 per year as of today.
The average US household consumes about 1,100 gallons of gasoline per year. This figure is consistent with the number of cars per household (2.3), the average commute in miles (about 12), the current number of miles per gallon (chart above), and the number of miles driven per year by people of working age (chart below).
On average, then, from a wholesale perspective households are consuming 1,100 gallons of gasoline at $3.15 per gallon or about $3465, clearly a much larger bill than the one for natural gas. Nonetheless, the impact of natural gas is evident, and not immaterial.
Above is the combined total of average natural gas and gasoline consumption per household. While the total figure is has been rising since mid-December, the annual consumption figure is more than $500 below its recent peak of $4168 last May, and only slightly above its average price for the past year ($3661 today versus an average of $3463). Even as the price of gasoline nears its highs, the household combined annual cost of gasoline and natural gas is much more restrained, due to the collapse in the price of natural gas.
As mentioned, this analysis is somewhat oversimplified since it omits the impact of electricity. It also ignores consumer behavior regarding the consumption of gasoline and natural gas. Families may cut back on their driving more than on their use of natural gas, for example, given that they have to pay cash for gasoline on a per-tank basis. Also, this analysis is based on wholesale prices and does not take into account the mark-up to consumers. What we can assume, though, is that there’s more than meets the eye in evaluating the impact of gasoline. Average household energy bills are not much higher than they’ve been all year.
(c) Stephen J. Morton, CFA
