Once again, we have an overreaction by consumers and the media as gas prices sneak closer to $4 per gallon. Much of it is based on emotion, not reality.
No one seems to bother to figure out that rising gas prices have relatively little impact on the average American’s household budget.
Irritated motorists are quoted in the media saying they will cut back on spending. Political commentators assert that consumers are already paying $500, $600, even $800 a month for gasoline.
One problem: those numbers are way off the mark.
In order to spend $800 a month, you would have to drive nearly 55,000 miles a year, assuming you average 20 mpg and the price of gas is $3.50.
If gas prices spiked by 50 cents and hit the $4 mark, that would cause an uproar across the nation. But why? If you drive 12,000 miles a year and get 20 mpg, an additional 50 cents at the pump would cost you $25 a month – less than $1 a day.
If you drive 10,000 miles a year and average nearly 30 mpg, the added expense would be $14 a month, or about 50 cents a day.
So, consumer confidence gets hammered by the price of a product just because it’s displayed on gas station signs at every corner and it’s hyped on the news every night.
At The Daily Beast, they point out that even the broad, macroeconomic effect of rising oil and gas prices are greatly exaggerated. That’s because the model for analyzing the impact of oil prices on GDP dates back to the 1970s. Those formulas fail to take into account that our cars and trucks are far more efficient today and the percentage of consumer spending on oil and energy has steadily declined over the past four decades.
Zachary Karabell of The Daily Beast even takes on the prospect of $150 a barrel, which would create worldwide panic. Again, why?
Here’s Karabell: “Americans today consume about 23 barrels of oil per person each year. That means that every $10 increase in the price of oil is a $230 hit (annually) to the “average” American. That burden hits different people differently. Let’s say that oil goes up to $150 a barrel, which would be dramatic. That would cost us another $1,000 each. OK. But this year, with the Social Security tax rebate, most of us have about $1,000 more than last year, so it’s a wash.”
