Analysis | The Surge in Gas Prices Isn’t as Painful as It Looks

It’s time to take a collective breath. Despite all the complaining about the cost to fill up, gasoline is no bigger a portion of household expenditures than it has been historically. The strategists at RBC Capital Markets ran the numbers and found that current fuel expenditures amount to 3.5% of total consumer spending, compared with an average of 3.6% in monthly data going back three decades. 

Here’s another way to think about this: The previous high in gasoline prices was around $4 a gallon in 2008, or $1 lower than they are now. But back then, gasoline expenditures accounted for 4.5% of spending, enough to lead to what the RBC strategists described as  “demand destruction.” Now, they estimate that the average price of a gallon of gas would need to rise an additional 35% to around $6.60 for the same to happen.  

One would think that there would be a high correlation between rising gasoline prices and demand, but there’s not. The RBC strategists found that in the 30 years leading into the pandemic, retail gasoline prices increased by more than 30% year-over-year in 39 individual months. Of those instances, gasoline demand fell by 2% or more only 12 times. They added that five of those instances were during the 2008 global financial crisis. 

And even then, 2008 is not a good benchmark for the historical comparisons, according to the RBC strategists. The reason is the 12 months leading into the all-time peak for oil prices in 2008 were accompanied by US household savings rates near a 60-year low of 3.5%, less than half of the historical average of 8.3% and comfortably below the current 5.4%. “Put simply, the last time gasoline prices hit record levels was during a period when the US consumer was never more financially vulnerable to energy price shocks,” the strategists wrote in a research report.

To be sure, demand for gasoline is falling as the price rises. According to Bloomberg News, implied US gasoline demand on a four-week rolling basis has fallen to 8.93 million barrels a day, the lowest seasonal level since 2014 (with the exception of 2020, when the pandemic first struck). But it would be too simplistic to conclude this has anything to do with high gasoline prices causing consumers to cut back. The Federal Highway Administration has data for only the first four months of the year, but despite gasoline prices soaring as much as 32% to around $4.33 a gallon, miles driven on all roads and streets rose by 4.5% from the same period in 2021 and is comparable to pre-Covid levels.  

To summarize, gasoline prices are soaring and demand is falling, and yet total miles driven is not diminishing. There are two logical explanations. The first is that cars have become much more fuel efficient, requiring fewer trips to the gas station to fill up. The average fuel economy for a new passenger car in the US rose to 25.4 miles per gallon in 2020 from 20.2 in 2000 and 16 in 1980, according to the US Energy Information Association.

The second is that electric vehicles continue to grab an ever larger share of the market. Electric vehicle registrations doubled over the past year to 5% of new cars, and their share of North American vehicles could hit 28% by 2028 and 59% by 2035, Axios reported, citing consulting firm AlixPartners. To be plain, the end of the internal combustion engine era is in sight. The European Union this week endorsed a push to eliminate carbon emissions from new cars by 2035. 

The stakes are high. Rising gasoline prices have become the No. 1 political problem for President Joe Biden, whose approval ratings just hit a new low at 39% and may cause Democrats to lose control of one or both chambers of Congress in the November midterm elections. But there’s really nothing the government can do to lower gasoline prices on a sustained basis. All the discussed short-term solutions, such as gas-tax holiday or issuing “rebates,” are likely to backfire by bolstering demand. The right thing to do would be nothing, but that’s not politically viable.

Still, if gasoline prices were truly hurting consumers economically, then why did auto-club AAA just forecast that around 42 million people will hit the road this Independence Day weekend, exceeding 2019 levels by half a million? (The group defines travel as moving 50 miles or more from home.)  The fact is the average American has no real reason to gripe about gasoline prices, and their actions are proving it.  More From Other Writers at Bloomberg Opinion:

• Biden’s Gas Tax Holiday Won’t Save Summer: Liam Denning

• The Wheels Have Come Off Electric Vehicles: Anjani Trivedi

• The Decline of Fossil Fuels Will Be Expensive: Justin Fox

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is the executive editor of Bloomberg Opinion. Previously, he was the global executive editor in charge of financial markets for Bloomberg News.

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