Pain at the Pump: Why gas prices are the most familiar price in the economy
Consumers feeling the pinch as gas prices surge +39.8% YTD
The Most Familiar Price We Notice
If one could identify a single item whose price is universally known, it would be the price of a gallon of gasoline. Oddly, it’s the one expense bringing all walks of life together. Gas stations are where we all gather briefly with regularity. Whether you’re an electrician or a beauty sales consultant, we all are to one degree or another gas price watchers.
The reasons are obvious. It’s our cost of transportation. Energy is the lifeblood of the economy fueling everything we want to do. From leisure to necessity, energy is what makes it all possible. While disruptions in the liquid fuels markets are underway, gasoline prices are still king for consumers.
The ebb and flow directly impacts our monthly budgets. The nature of gas consumption makes it so we make regular stops to fill up. The routine varies from daily to weekly trips to the pump. As a result, we’re constantly reminded of global oil market dynamics and notice minute fluctuations down to the penny on unleaded fuel. Prices shoot up a dime, you hear grumbling. They drop a nickel, and silent nods are given in agreement. Regardless of the direction, we begrudgingly accept the random swings as facts of life.
Some may argue grocery bills have similar effects, and to a degree this is true. The difference with groceries are they lack a certain repeatability. Some goods you are constantly repurchasing with the same frequency as filling your tank, but tastes change. Maybe you’re on a cereal kick for a month, but then swap it out for oatmeal or eggs the next. You’re on a new diet and now you no longer eat pasta twice a week. Down the produce aisle you go—an unfamiliar jungle of leaves and vibrant colors.
With the gas cap reminding you, “Unleaded gasoline only,” there are no substitutes. Unlike groceries, however, gas prices may be the most honest price you notice. It’s one of the few goods you purchase on a per-unit basis explicitly. Outside of the archaic 9/10ths of a cent adder bolted on the end of your price per gallon, the price is rather transparent. Most other goods quote in reverse. You purchase the product as it stands with the unit price often obscured. You buy a package of goods, not the goods per ounce.
In packaged goods like toilet paper, you contend with deciphering the endless variations of different sizes. Giant, huge, monster, large, mega, enormous, or family rolls and their “comparisons” to whatever a “regular” sized roll is these days. The conversion factors are so byzantine you relent and grab whatever you think is the best value.
Cereal is similar. The boxes change sizes with regularity making price analysis a much more difficult task. That’s the game of consumer staples marketing; keep the target moving so customers don’t notice price hikes. Jumps in gasoline prices are noticed immediately. There is minimal recourse; you must open your wallet if you want to go to work or the bowling alley.
Gas Price Surge of 2021
Gas prices have been on a tear since the start of the year. Year-to-date gas prices have climbed 39.8% from January to October alone.1 The inflation generated from several rounds of stimulus checks is ripping through the economy. Consumers are taking notice.
With the stimulus checks, too much money is chasing too few goods. The end result is higher prices throughout the economy. Unfortunately, the most demand inelastic product, energy, is surging in price. People just have to eat the hikes and cutback elsewhere as energy costs crowd out leisure and nonessentials from the budget.
Burned by the collapse in oil prices in 2020, energy producers are remaining very patient. Production is being very gradually ramped up in the United States with the oil rig weekly rig count increasing by just 1%.2 This is occurring as oil prices are at their best levels in years. The acute energy recession in 2020 was sobering for producers as they restructure. The mantra now is prioritizing profit per barrel over gross barrel production. Growth for the sake of growth is no longer acceptable.
Attempts to mitigate pain at the pump are being made. China, India, and the U.S. are tapping into their strategic petroleum reserves to ease oil prices.3 The remedy may not necessarily work. While oil prices have retreated in recent weeks, largely due to panic over renewed lockdowns, gasoline prices remain stubbornly elevated at a time when cheaper winter blends are being added to station tanks. There is a level of disconnect between cost inputs such as oil and the refining process producing gasoline.
Some are choosing to navigate away from liquid fuels as batteries are quickly making it possible. Utility rates are notoriously stable and typically locked-in at a fixed kilowatt-hour price for the year. Going forward this may make the price of a gallon of gas less relevant to those individuals.
Decarbonization is the theme for utilities and the way many are aiming to get there is by relying on natural gas to replace coal. The problem is natural gas is far more volatile than gasoline prices, as the recent polar vortex and rolling blackouts this past February showed. As some hope to put global oil market swings in the rearview mirror by purchasing an electric vehicle, we may be trading one gas for another: natural gas.
U.S. Energy Information Administration. Retrieved November 28, 2021. U.S. All Grades All Formulations Retail Gasoline Prices. https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epm0_pte_nus_dpg&f=m
Baker Hughes. Retrieved November 28, 2021. Rig Count Overview & Summary Count. https://bakerhughesrigcount.gcs-web.com/rig-count-overview?c=79687&p=irol-rigcountsoverview
Chakraborty, Debit. November 23, 2021. India to Sell Five Million Barrels of Strategic Oil Reserves. Bloomberg. https://www.bloomberg.com/news/articles/2021-11-23/india-to-release-5-million-barrels-of-oil-with-chance-of-more