Gas Prices Fuel Highs and Lows in Confidence (On Consumers)

The Strait of Hormuz. At its narrowest point the strait is only 21 miles from the tip of Oman to the coast of Iran. Not a very wide passage through which 20 percent of the planet’s oil must flow. And yet the strait has an impact on your confidence in the American economy and your notions of discretionary spending: when, how much and on what.

The price of oil and its relation to the price of gas at the pump, of course, are subject to supply and demand. Those prices are also governed by speculative commodity trading, which is influenced by world events, including political posturing by oil-producing countries such as Iran. So, it is little wonder why our policy makers and politicians voice frustration over the retail price of gasoline and how it potentially plays havoc with our economic recovery, as there is very little they can do about it.

Gas prices in Arkansas have risen about 25 cents over the last month to an average of $3.55 per gallon. Last year, from February 2011 to March 2011, gas prices increased nationally over 35 cents per gallon to roughly $3.60. Déjà vu! And during these fluctuations from an already high $3-plus per gallon, the whip-sawed consumer muddles through, trying to make heads or tails of his personal economy and how to practice safe spending in the eventuality of a further spike in prices.

Upwards of 70 percent of the economy is made up of consumer spending, which is driven by discretionary income. Discretionary income is what you have left after paying monthly essentials like the mortgage or rent, food, clothing and transportation. When the transportation part goes up significantly, retail stumbles. When retail stumbles, other parts of the economy take a fall. What makes this equation more difficult here is that Arkansans rank sixth in the nation in the number of miles driven annually per capita. We’re in the car or truck a lot. And although overall fuel consumption is declining due to better vehicle gas mileage, hybrids and general conservation (in part because of higher prices), the relationship between what we pay for gas and what we pay for other essentials is out of whack. The result? Consumer spending flat-lines.

Now, so far, our personal economy seems to be absorbing the rise in gas prices. With unemployment slowly receding and consumer spending making modest gains, we seem to have become used to adjusting our budgets to take care of gasoline purchases. Even spending on the Arkansas lottery appears to be holding up, with the second week in February setting a sales record. (One could argue there is nothing more discretionary than buying a scratch-off ticket or taking a chance on a draw game.)

But what has yet to be experienced is how a sustained price approaching $4 or more at the pump will alter consumer attitudes and abilities, even as they cautiously give in to their own pent-up demand for judicious spending. In fact, we need look no further than the Gallup organization’s measure of self-reported individual daily spending. Today it stands at roughly $63 a day, down from $76 during December’s holiday shopping. No surprise there. What is telling, however, is this time last year when gas prices were at 10 cents a gallon higher than they are today, daily spending was $58. An additional 30 cents to 50 cents per gallon could make a significant difference.

If pump prices continue to rise, one thing is clear: keeping your wheels gassed up will eat into household budgets and negatively affect consumer confidence and spending. And if they significantly rise in the coming summer months, even housing sales during this active selling season could be hurt as confidence wanes.

Watch the pump, keep an eye on your pocketbook, and see if you can plan ahead to adjust your household budget for a likely surge in gas prices. The health of the overall economy and your personal well-being may depend on it. No pressure. 

Craig Douglass is an advertising agency owner and partner with Zoe and Ernie Oakleaf in InFocus LLC, a Little Rock-based focus group research company.