My Two Cents - "Inelastic? You betcha!"
5/11/2007
I open my follow-up to last week's gas poll with a sobering quote from Peter Meyer, featured in Bloomberg this morning:
"It looks like gasoline demand will be pretty strong," said Peter Meyer, a commodity trader for Lehman Brothers Holdings Inc. in New York. "Seeing $3 at the pump is no longer enough to curtail demand. We now have to see $4 before people change their behavior."
Although I am usually opined in 180 degrees to the opposite of the mainstream financial press, amazingly enough, I cannot help but agree with him. I guess there is a first time for everything!
The following represents a tabulation of the 354 replies that I received in response to the questions posed last week.
To all those that replied I thank you. Many of the replies again, consisted of many paragraphs, thoughts and opinions. Your time and efforts are greatly appreciated. I've included some of the more notable quotes below the quantitative survey results.
1) Where are you from (city/state) and how much is regular unleaded in your area?
The average cost of the locations responding was $2.97
2) Do you pay attention to the price when you fill up?
31% Yes
69% No
3) Do you converse with friends in your area and share info about 'cheap' gas?
18% Yes
82% No
4) At what price level (if you haven't already gotten to that point) will you change your behavior?
16% Already making changes
35% $4/gallon
26% $5/gallon
23% Above $5 (The highest was $20/gallon)
5) How will the price of gas affect other expenditures you had hoped to make this summer?
22% At least some change
78% No changes planned
6) Does your location have any influence over your consumption of gas?(if you live in a rural area do you find yourself planning your trips out etc)
32% Yes
68% No
Eric from Texas - "Everyone is more concerned with who the father of Anna Nicole's is than their own pocket book. We have turned into or been turned into a bunch of sheep."
Ana from California - "There is a serious entitlement perspective that is pervasive in this country. And it'll make things that much more painful when the correction really takes hold."
Rich from Illinois - "I think many people may be locked-in to buying gas (even at higher prices) because of the way our cities and suburbs have "sprawled".
Mike from Oregon - "When gasoline is bought on credit and financed with credit (your student's dad), behavior will change radically when credit is denied. I am not just thinking of an individuals credit card, but the financing of American debt. When we realize we are poor, Watch Out Beloooowwww!"
Ira from parts unknown - "Unless you are suffering from some sort of liberal guilt complex, your rant on prices is out of step."
Colin from Texas - "So, to answer your question, "How high is too high?", it will be too high if it happens too fast and it is a real "shock" as opposed to a "shock" reported ad nauseum by the media. Prices could probably increase to $5 before people started changing their car buying habits instead of only complaining about their gas bill but no one can really say until it happens."
Reading the rest of today's Bloomberg piece, it would seem that most experts are now planning to see demand destruction at $4. I think we'll get a chance to test that this summer, especially if things continue to go as they have with regard to all the outages at refineries, and small disruptions in supplies (mainly Nigeria at this point).
I had one reader email me with the assertion that gasoline prices don't matter as long as you own enough stock to offset the price increases. I was going to respond to her individually, but decided that since she posed what I consider to be a pretty decent idea, I'd share it with everyone as a potential strategy.
Obviously, it is unwise and imprudent to tuck one's entire nest egg into energy stocks. Oil prices while having the potential for parabolic growth also have the possibility of collapsing if meaningful alternatives come to market. I realize that given the nature of the world, this is probably not a very likely scenario. It is much more likely that there will be a massive crisis before any serious investment in alternatives is undertaken.
Let me use my own situation as a template: Back in December, we hit a year low of $2.17/gallon of regular gas. We are now at $2.89. That represents a 72 cent/gallon increase. My family consumes approximately 35 gallons per week, give or take a couple. That change has represented a $25.20/ week increase or $100.80/month increase. So to cover just the 72 cents that we've already seen, I need to find $100/month in dividends after taxes. Let's assume that I can invest my money in energy trusts that pay 10%/year. Let's also assume that the dividends are taxed at 15%. If I have $15,000 invested in such vehicles, I'll pull $1,500/year in dividends. After taxes, I will have $1,275 left, which comes out to just a bit over the $100/month that I needed to cover. If the price of gas goes to $4, I will need to cover $155.40/month and will need around $22,000 in such investments to cover it. For many people, this may be a viable strategy. Or at the very least one might use this strategy as a partial hedge to cover some of the extra money going out.
Again though, energy investments can be volatile, and force one to either develop a metal stomach or be subjected to gut-wrenching ups and downs. I wouldn't recommend that anyone go and sock their entire 401K into energy trusts. Rewards do not come without risk. If one were to find lower risk individual stocks or ETF's much more investment would be required to complete the hedge.
I went out last week in an attempt to find out what was really going on in the mind of the consumer and what was likely to happen down the road with regards to gas prices. I found that the demand for gas is very inelastic, much more than I had previously believed. Many of the people that responded said that they had cut back on other things such as meals out, luxuries and other discretionary items so as to maintain their current level of gasoline usage. To some degree, I have done the same thing. The bottom line is that there is likely to be market support for higher prices going into the summer, at least from a demand perspective. An interesting note: Retail sales were downright awful in April and one of the culprits was higher gas prices. So while demand for gas may not be destroyed, it certainly seems that not all areas will escape the coming carnage.
Tune in to 'Beat the Street' live Thursday evenings at 8PM. On Thursday, May 10th, my guest will be Joe Cristiano from Liberty Talk Radio, taking your calls and discussing economic issues facing Americans today. For more information, please visit www.blogtalkradio.com/my2cents Archives of the shows may be downloaded at www.my2centsonline.com/radio_archives.htm
Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.