Gas Price Drop a Good Sign for Summer Months
Memorial Day is approaching and that typically means gas prices have spiked
at pumps across the nation. That would be true in a typical year, but 2011
is anything but, and prices have come down in recent weeks following increases
that had consumers shelling out around $4 a gallon.
Prices have dropped nearly four percent since gas hit its highest level for
the year ($3.985) on May 4, according to MasterCard Advisors.
“Higher prices were the function of a speculative bubble, well beyond
any sort of fundamental justification,” Stephen Schork, president of The
Schork Group Inc., told Bloomberg News. “The market is correcting
now.”
The prospect of lower gas prices has economists cautiously optimistic that
consumers will continue to spend during the summer months.
“When the price of gasoline falls, people feel better,” Chris G.
Christopher Jr., a senior economist with IHS Global Insight, told The Boston
Globe. “Maybe they’ll spend a bit more or have a nicer vacation because
of it.’
Phil Flynn, an oil analyst with PFGBest, told the Globe, “I think
retailers are going to be vying to get people into their gas stations. It’s
going to be very competitive.’
AAA expects nearly 35 million American will travel 50 or more miles away from
their homes this weekend for some sort of Memorial Day activity. That’s about
100,000 more than did the same last year.
“Memorial Day travel experienced a gain of more than 14 percent in 2010,
and this year we expect to add slightly to that gain due to an increase in
air travel and an improvement in the overall domestic economic picture,” said
Robert Darbelnet, president and CEO of AAA, in a press release.
In a AAA survey, six out of ten said rising gasoline prices would not affect
their travel plans for the holiday. Of the remaining four, 70 percent of those
said they would economize in other areas to compensate and 30 percent said
they would either take a shorter trip or travel by alternate transportation.
- Gas Prices Not Expected to Keep Americans Home Memorial Day Weekend, AAA
says – AAA - Gas Poised to Decline as $4 Drives Down Demand: Energy Markets – Bloomberg
News/Bloomberg Businessweek - Staycations? Not this holiday — gas prices are down – The Boston Globe
- How gas prices will affect Memorial Day weekend spending – The Philadelphia
Inquirer
Discussion Questions
Discussion Question: Do you expect consumers to respond positively to lower prices at the pump although the cost of filling up is still much higher than last year at this point?
“Lower” gas prices is certainly a relative statement. Anything over $3 a gallon makes a big impact on driving behavior. Staycations are sure to be the norm this summer and shopping trips will continue to be fewer, closer to home. Convenience retailers will have to get very creative to battle the sticker shock at the pump and get shoppers in the door to pick up refreshments after spending $50-$100 on a tank of gas.
Bottom line: This will be a tricky summer for those dependent on traveler spending.
Since the media now gives constant coverage to every change in average pump price, it is inevitable consumers will respond to even mild fluctuations, so a small drop in gas price for Memorial Day can only help retailers. However, it is far too early too assume that prices will continue to fall this summer, especially looking at all the unrest in the Middle East.
Consumers will respond positively to lower gas prices. After the recent run-up, the marketplace is ready for a price adjustment. That being said, gas prices are still taking a big bite out of wallets and consumers will be wary of overextending in other areas, when any incident in the Mideast could sent the prices skyrocketing again.
Any decrease in the cost of fuel is welcome, but to have a large impact on consumers’ perception the price will have to drop a lot further than four percent. We all fairly rapidly adjust to the new normal, but a $.16 drop in the price of fuel is not going to cause a buying frenzy.
Unlike most products, the price of fuel is required by law to be posted so every competitor and customer can see what you are charging. Add to that pricing transparency the fuel retailers’ mantra has always been “project the gallons because profits come and go.” Translated, that means fuel retailing is and will remain a very competitive environment.
There are a few gauges that impact on people’s response mechanisms when they relate to their daily lives. Two such gauges are are the prices for food and gasoline. But those two factors alone do not exist in a vacuum.
Other things help balance our emotions, upward or downward. And since there are numerous other depressing events also occurring–tornados, storms, Middle East distress, unemployment, etc., the reductions in current gasoline prices from a historically high base, which we grin and bear, isn’t likely to cause consumers to jump for joy.
Gas prices are really all about cash flow for consumers. The higher the gas prices the less cash consumers have for spending on consumer products in the retail store.
We recently spent the better part of a day shredding an attic full of old financial records and receipts we were disposing of. In the process I really paid attention to some of the charge statements and checks.
Take 1987 for example. Our per item individual shoe, clothing and housewares purchase costs were not noticeably different from today. Couldn’t really gauge the groceries because we mostly paid cash then. The monthly electric and natural gas bill (for our same house) were less in 1997 than 2011 but not in a way that took your breath away. But oh, the car gas bills! For 2 vehicles with similar MPG stats to our current cars (and being driven within the same geography and conditions) the per fill-up cost difference was staggering. $15 and change then–versus $55. each time we hit the pump, now. You do the math.
It will take more than a few cents improvement in gas prices to get most families’ paychecks and psyches back into kilter so they can spend on other things.
Perhaps the counterpoint in this discussion is more important than the point. Sure, gas prices are down a little bit, except here in the Great Lakes states where we just got hit with a jump due to a “refinery issue”–just in time for Memorial Day. How ironic….
But the counterpoint is that people are not changing their driving habits with $4 gas. They are sacrificing in other areas rather than curtail their driving significantly–and then only in the extreme cases like whether or not to drive to Florida for vacation this year.
This is why gas and food are so critical to our overall economic performance. Their price has a disproportionate impact on our other spending because, in today’s America, these two commodities comprise the bottom tier of Mazlow’s hierarchy of need. Consumers are demonstrating that they will pay whatever the price.
Whenever gas prices go up, it’s like a tax increase–cash coming out of consumer’s pockets. When prices go down, it’s like a tax cut–more cash is available for consumers to spend on other things. So gas prices coming down is a very good thing for retailers.
The larger question is whether they will continue declining, or whether they will turn around and go back up. My take is that prices are likely to maintain these new lower levels for a while, and then trend gradually downward.
There’s been a number of suggestions as to what caused the sudden drop in commodity prices, including oil, several weeks ago, and they all suggest to me a bursting of an investor-driven bubble. What’s striking is the dramatic rebound in the value of the dollar, which is the currency crude is denominated in.
The drop in gas prices, as well as other commodities, will be good for the entire economy. This, in fact, could be the trigger we need to see the economy finally begin to rebound in a more robust way.