• 4 minutes Tariffs to derail $83.7 Billion Chinese Investment in West Virginia
  • 9 minutes Battle for Oil Port: East Libya Forces In Full Control At Ras Lanuf
  • 17 minutes Kaplan Says Rising Oil Prices Won't Hurt US Economy
  • 2 hours Could Venezuela become a net oil importer?
  • 1 hour Reuters: OPEC Ministers Agree In Principle On 1 Million Barrels Per Day Nominal Output Increase
  • 2 hours Tesla Closing a Dozen Solar Facilities in Nine States
  • 4 hours Saudi Arabia plans to physically cut off Qatar by moat, nuclear waste and military base
  • 4 hours EU Leaders Set To Prolong Russia Sanctions Again
  • 1 hour Why is permian oil "locked in" when refineries abound?
  • 39 mins Oil prices going down
  • 16 hours Teapots Cut U.S. Oil Shipments
  • 2 mins Gazprom Exports to EU Hit Record
  • 1 hour Could oil demand collapse rapidly? Yup, sure could.
  • 12 hours Battle for Oil Port: East Libya Forces In Full Control At Ras Lanuf
  • 4 hours China’s Plastic Waste Ban Will Leave 111 Million Tons of Trash With Nowhere To Go
  • 7 hours Saudi Arabia turns to solar
  • 17 hours Putin Says 'Fierce' U.S. Politics Hindering Summit With Trump
  • 6 hours EVs Could Help Coal Demand
  • 17 hours Hot line, Macron: Phone Calls With Trump Are Like Sausages Best Not To Know What Is Inside
Alt Text

Why Natural Gas Prices Will Rise This Summer

Record natural gas production has…

Alt Text

Miami Is Running Out Of Gasoline

Hurricane Irma is nearing Florida…

James Hamilton

James Hamilton

James is the Editor of Econbrowser – a popular economics blog that Analyses current economic conditions and policy.

More Info

Trending Discussions

Growing Consumer Indifference To Gasoline Prices

Growing Consumer Indifference To Gasoline Prices

U.S. retail gasoline prices last week averaged over $2.80 a gallon, thirty cents higher than a month ago. The preliminary University of Michigan index of consumer sentiment for May was 88.6, down 7 points from the month before. Are these two developments related?

The consumer sentiment index is plotted in black in the graph below with units on the left scale. The negative of the gasoline price in real terms (deflated using the CPI) is shown in blue, with units on the right scale. I have plotted the negative of gasoline prices to help highlight the negative relation between the two series– when gasoline prices go up (a fall in the blue line), consumer sentiment goes down (a fall in the black line). Consumer sentiment had been improving steadily as gas prices fell (or the blue line rose) last autumn. Since gas prices came back up, sentiment has tumbled. Related: Top 4 Oil Companies For Dividend Investors

ConsumerSentiment

Black: University of Michigan consumer sentiment, 1978:M1-2015:M5 (May 2015 is preliminary estimate, scale is on left). Blue: negative one times the average real U.S. retail price of gasoline, all formulations, in April 2015 dollars per gallon as calculated by deflating by the CPI (May 2015 is preliminary estimate, scale is on right). Related: E.U. Could Provide Push U.S. Needs To Lift Energy Export Limits

One quick way to describe the relation between these series is with a regression of each month’s change in consumer sentiment on that month’s change in the real price of gasoline. Results of that regression are reported below, with t-statistics in parentheses. If the monthly price of gasoline were to jump by $1.00/gallon, the regression would predict about a 5-point decline in consumer sentiment.

Formula

(Click Image To Enlarge)

Although the coefficient is highly statistically significant, this is a much smaller response than had been found in earlier studies such as Edelstein and Kilian (2007). The relation appears to be significantly weaker in the more recent data than was seen in the older data. For example, if we estimate the regression using only data over 1978:M2-2007:M7 (the sample period used by Edelstein and Kilian), the coefficient is -12.0 instead of -4.9. Based on the data prior to 2008, we would expect about a 12-point drop in consumer sentiment if gasoline prices rose by a dollar. Related: Oil Industry Can No Longer Ignore Climate Action

Referring back to the figure above, we can see what seems to have happened. The first time gasoline prices reached $3.00 a gallon in September 2005 (or $3.50 a gallon in 2015 dollars), consumers appeared to be shocked. When it happened again the following summer, the decline in consumer sentiment was much more muted. And when the threshold was crossed a third time the following year there seems to be barely any response. It was only when prices went on to new highs (to over $4.00/gallon in 2008) that it seems to have again caught consumers’ attention. Nonetheless, when gasoline prices plunged as the recession worsened, it brought little cheer– consumers by then had bigger things to worry about. It is only in the data over the last year that the two series are back to tracking each other as closely as they had seemed to a decade ago.

If we use the full-sample coefficient estimate of -5, the 30 cents/gallon increase since April would have been expected to be associated with a 1.5-point drop in consumer sentiment. Even if we used the coefficient of -12 from the earlier data, we would still have only expected to see a 3.6-point drop in consumer sentiment, only about half of what was actually observed.

My conclusion is that rising gasoline prices surely contributed to the recent decline in consumer sentiment. But I suspect that other factors are more important.

By James Hamilton

More Top Reads From Oilprice.com:




Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News