Tags: Rising Gasoline Prices Force Spending Trade-Offs

Rising Gasoline Prices Force Spending Trade-Offs

Tuesday, 18 Jan 2011 02:45 PM

Americans are starting to watch their spending more carefully as gasoline prices stay at levels not seen since October 2008. The national average for a gallon of regular hit $3.10 on Monday, according to AAA, Wright Express and the Oil Price Information Service. That's about 12 cents more than a month ago and 35 cents more than a year ago.

There are signs that consumers are making trade-offs, like skipping a dinner out or a movie, because they have to spend more to drive.

"It's one of the reasons why we think of higher commodities prices as more of a threat to demand than inflation at this stage of the game, because it's forcing cutbacks elsewhere in the economy," said Diane Swonk, chief economist at Mesirow Financial. "One of the things I'm concerned about is how high will prices go."

Swonk estimates gasoline prices are affecting the spending habits of more than half of U.S. drivers. She noticed consumers starting to make trade-offs in November and December. "As we moved into December, even some of their gift purchases were curtailed as prices at the pump continued to escalate," she said.

Motorists in some states — including Oregon, California, Washington and New York — are paying from $3.20 to $3.71 a gallon or more. The average price in those states could top $4 a gallon by spring.

For every penny the price at the pump increases, it costs consumers overall an additional $4 million, according to Cameron Hanover analyst Peter Beutel. If the price goes up a dime, it means consumers pay $40 million more each day that 10-cent hike is in place.

Swonk and other analysts wonder how Americans will make spending choices in the months ahead. "The last thing we really want is ... that the increased cash created by the payroll tax cuts is used to fill up our tanks instead of stimulate demand," she said.

Gasoline is closely linked to the price of crude oil, which is at its highest level in 26 months, driven mainly by stronger demand in other countries, particularly emerging markets such as China. Benchmark crude for February delivery was little changed in midday trading on the New York Mercantile Exchange, down 8 cents at $91.46 a barrel.

The International Energy Agency predicted that worldwide economic growth and a cold winter in the northern hemisphere will support higher-than-expected oil demand this year. The Paris-based agency expects demand will rise to 89.1 million barrels a day — up from 87.7 million barrels a day in 2010. The IEA warned that high crude oil prices could slow economic recovery, and oil producers, investors and consumers will suffer if prices stay around $100 a barrel.

In other Nymex trading in February contracts, heating oil rose 0.77 cent to $2.6529 a gallon, gasoline lost 0.27 cent at $2.4919 a gallon and natural gas futures fell 5.8 cents to $4.422 per 1,000 cubic feet.

In London, Brent crude rose 48 cents to $97.91 a barrel on the ICE Futures exchange.

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