Little Impact on Buyer Behavior
Last week’s news that California gas prices may reach the unheard-of price of $2 a gallon this summer struck a nerve in car-happy L.A., where people drive to the corner 7-Eleven.
But if it has brought back visions of the 1970s, when gas rationing and long lines at the pump were the norm, rest easy. It’s nowhere near that bad.
Rising fuel prices may mean Angelenos will change their driving habits a bit, and become more aware of where to get the best price for a tank of unleaded. And there are local industries that will feel the pinch of greater fuel costs and agonize over how or whether to pass those costs on to consumers. But the overall economic impact is likely to be muted.
“To have a dramatic change in economic behavior would require more of an increase than what we are seeing now,” said economist Tom Lieser, executive director of the UCLA Anderson Forecast. “(Gas prices) would have to go to four or five dollars a gallon. Going from $1.50 to $2 isn’t going to do it. It’s still cheap gas. People will adjust to it very fast, although there’ll be some grumbling.”
It is true that pump prices are at unprecedented levels. The average price of gasoline in California for the second week in March was a record $1.63, according to the U.S. Department of Energy. And a combination of a tight market worldwide for crude oil and low U.S. gas reserves means that prices will go as high as $1.75 $1.80 nationwide in the peak summer months, the department predicted in a report last week.
Because California’s cleaner-burning gasoline is around 10 to 15 cents more expensive than the national average, $2 a gallon is quite possible.
“U.S. wholesale and retail gasoline prices are poised to surge to unprecedented levels before the spring is out,” the Energy Department’s report said. “It is becoming increasingly apparent that, so far as gasoline markets are concerned, the United States is moving into uncharted territory.”
Well, yes and no.
While gasoline is almost twice as expensive as it was a year ago, after adjusting for inflation, a gallon of gas costs less than it did 20 years ago. In 1981, the average per-gallon price was $2.30 in 1998 dollars, according to the Energy Department.
“I think that in (year) 2000 dollars, the peak price of gas back then was something like $2.75,” said David Costello, an Energy Department economist who put together last week’s report. “Basically, there has been a decline in real gas prices” over the past two decades.
Inflation isn’t the only reason for this. Despite the recent consumer craze for sport utility vehicles and large trucks, both of which require more gasoline per gallon to operate, the trend toward more cars that get better gas mileage has helped keep demand relatively stable. There has been a direct cause-and-effect impact on gas prices as the overall fleet of automobiles on the road today has become more fuel-efficient than in the 1970s and 1980s, Costello said.
That trend has leveled off in the past few years, thanks in part to the increasing popularity of SUVs. But thousands of old-model gas guzzlers are junked every year, offsetting that somewhat.
Not a repeat of the ’70s
That efficiency extends to the economy in general. Even as demand for energy has increased in absolute terms over time, the United States has become more energy-efficient. In 1990, 13,740 British thermal units (the standard measurement of energy output) per dollar of gross domestic product were consumed. In 1999, it was only 11,830 BTUs per dollar of GDP.
“It just shows that the growth in the economy is less energy-dependent now,” Costello said. “We use more efficient equipment.”
That points to a key difference between the rise in oil prices now and that during the 1970s, or even in 1990 in the wake of the Iraqi invasion of Kuwait. The U.S. is less dependent on foreign oil now than before.
The other difference between now and then is the mistaken perception in the 1970s that the world was running out of oil. Right now U.S. reserves are low, and the nations of the Organization of Petroleum Exporting Countries are limiting production. But there is no doubt that the oil exists.
“There are more oil reserves today than there were 20 or 30 years ago,” Costello said. “If we were running out of oil, that wouldn’t be the case.”
OPEC is expected to boost production in the spring, and prices should drop late in the year. But until then, supply will be tight.
Meanwhile, will it make much of a difference in the car-crazy society that is Southern California? Not likely, the experts say.
“At less than $2 a gallon, people don’t seem to change their driving habits,” said Jim Hossack, vice president and senior consultant at AutoPacific Inc., a Santa Ana-based automobile consulting firm. “And gas has to get between $2.50 and $3 a gallon before people really begin to change their (automobile) purchasing habits.”
Because the average consumer spends between $1,000 and $1,200 a year on gasoline, a 33 percent rise in price from $1.50 a gallon to $2 translates to an extra $500 or so per year. Given the current economic climate, consumers will hardly notice, Hossack said.
“America is the wealthiest country the world has ever seen,” he said. “The Dow is at 10,000, there’s almost no unemployment. Instead of going to pick up the kids at school, and then making another trip to the market to buy groceries, people will pick up groceries on the way home from picking up the kids. But this isn’t going to mean (an increase in) carpools.”
He acknowledges that high gas prices will hurt some businesses like trucking companies and indeed, truckers already are feeling the pinch.
“Last August or September, diesel fuel was $1.15 or $1.20 a gallon. Right now it’s $1.70,” said Joe Nievez, president of Qwikway Trucking Co. and past president of the California Truckers Association. “As a consumer, I can choose when to buy gas, and I can choose not to use my car. From a business standpoint, I can’t do that. We charge a fuel surcharge based on the price of gas in Southern California. I can’t absorb a 40 percent increase in my diesel costs. And competition is fierce, so it could affect business.”
But even Nievez doesn’t expect the current situation to last. And that mindset seems to be reflected by consumers, who continue to buy less fuel-efficient automobiles. Though the gas price increase is too recent for the effects to be quantified by those who track sales of SUVs and trucks, dealers say business remains strong.
“At this point, we haven’t seen any impact at all,” said Tawny Arnaud, vice president of sales at North Hills-based Galpin Motors Inc., the largest SUV dealership in Southern California. “Sales continue to be brisk. The perception is that this is all temporary.”