Written by John V. Boardman & Andy J. Reynolds
|
22 February 2012
As Energy Prices Soar Will Consumers Cut Spending?
By: Andy J. Reynolds, MBA
As the seesawing between Greece and European nations continues (this morning Greece reported to have forcefully accepted unpopular fiscal measures and private bondholder losses in exchange for a $172 billion bailout which will avoid March defaults), I thought it would be appropriate to refocus our conversation this week on an area that presents a challenge to the economic recovery – high energy prices. Most of us have felt prices at the pump increase to an average $3.57 per gallon, nationally. This is nearly a doubling in gas prices from 2004 – at which point gas prices were also a hot topic during that year’s Presidential elections.
If history repeats itself, which we typically see, gas prices may increase to $4.66 per gallon at the peak of the summer. So far, in 2012 we are on track to reach that level with the average gas price already setting record high numbers (the previous high recorded for this time of the year was $3.51 per gallon). Below is a chart demonstrating the 2012 year to date price of a gallon of unleaded gasoline compared to the past 7-year average price per day.
The affects of reaching all-time highs in gas prices could be the factor that dampens our current run-up in the markets, due to several reasons. The first negative impact of rising gas prices may be directly reported by consumer confidence. Currently, we are sitting at a 12-month high for consumer confidence, which is really good! Unfortunately, however, as gas prices rise consumers may become more frustrated with the costs of transportation, lack of excess discretionary income, and overall costs of normal living. Ultimately these factors or a combination of them may lead to lower overall confidence.
Secondly, in the environment that we live in today, nearly all of our products are shipped in from some other city, state, or country. Whether they are transported by truck, plane, or boat, their prices are most likely dependent (in-part) upon the costs of moving the items. As the costs of transporting the items increase from the producers, this increase will be passed onto the consumer over time. Recently, we have not experienced too much of an increase; however, several companies have acknowledged that their profit margins are being cut from increased shipping costs and they will pass on the costs at some point in the near future. This overall effect may result in higher long-term prices for products, potentially leading to higher inflation.
Lastly, and most obvious, the increase in gas prices will cut into consumer’s discretionary income. Those consumers living paycheck to paycheck will likely need to cut back on some other current spending trend to keep up with their transportation costs.
Many columnists have reported expectations of $5 per gallon gas this summer. While in today’s environment nothing surprises me anymore, I do not expect to see $5 per gallon gas. I believe that as the price approaches the $5 mark, the consumer will decrease demand to make it unproductive to increase gas that high… for this summer at least. Now, it is important to note that any major war/conflict with the Middle East could cause the price to soar above this mark.
Finally, it is important to take a step back and recognize that the U.S. does not have it that bad for gas prices. Globally, the US falls in the lower ranks for gas prices, with a weighted average below the global average. Our $3.57 per gallon cost is much more desirable than the $8/$9 per gallon costs in countries like Denmark, Italy, and the United Kingdom.
