Lower Gas Prices Are No Christmas Miracle

by Dan Burrows | November 28, 2012 11:25 am

Will lower gas prices save Christmas?

Well, they sure won’t hurt, but it appears the supposed effects of sliding gas prices on holiday shopping are very much overblown.

Since higher gas prices effectively are a tax on consumers — with every 1-cent increase in the price of a gallon costing them roughly $3.8 million in disposable income a day — well … any reversal should theoretically mean they have more to spend, on everything from food to clothing to Chia Pets.

The national average price of regular gas is up 1.8% year-over-year, but dropped significantly (by 7%) in the month heading into the Black Friday kickoff of the all-important holiday shopping season. That has some folks looking for a little extra Christmas boost.

“We believe the sequential decline gave consumers more confidence to splurge on discretionary items on Black Friday,” Citigroup (NYSE:C[1]) analyst Deb Weinswig wrote in a note to clients.

Maybe, maybe not.

Marshal Cohen, chief industry analyst for retail and consumer spending at NPD Group, the giant market research and consulting firm, says prices at the pump don’t really matter all that much.

Indeed, with the exception of low-income consumers, gas prices have very little impact on holiday spending. Headline “per gallon” numbers don’t matter, he notes. What’s key is miles driven — that is, how far consumers have to motor to get to where they’re shopping. Prices affect where customers come from — not how much they spend.

Additionally, although there’s some evidence that consumers go nuts when prices cross a dollar-level threshold (at least on the way up) to, say, four bucks a gallon from $3, it’s the rate of change that matters more.

That’s because much of the impact on the economy of an increase in oil prices comes from abrupt changes in the patterns of consumer spending, writes James Hamilton, professor of economics at University of California, San Diego. So presumably, the same is true when prices don’t fall abruptly or cross a dollar threshold on the way down.

“If consumers have recently seen even higher prices than they’re paying at the moment, their spending plans and firms’ production plans are likely already to have incorporated that reality,” Hamilton notes.

Perhaps most important is that the savings from lower gas prices aren’t all that impressive when put in the context of massive holiday spending.

According to the U.S. Energy Information Administration, Americans consume an average of 378 million gallons a day. (Yes, they drive more in summer than winter, but we’ll go with this average figure.)

A month ago, the national average price for a gallon of regular gas was $3.543, according to AAA. It has dropped to $3.415 since then. Using the daily consumption figures, that saves U.S. drivers about $48 million a day — and at that rate, they’ll save a total of about $1.45 billion in the 30 days before Christmas.

Sounds like a windfall! Too bad those savings are but a drop in the egg nog.

It’s estimated that Americans spent more than $59 billion over Black Friday weekend alone, according to a survey by the National Retail Federation. That means the projected savings on gas amount to only 2% of the spending Americans did just last weekend. By the time they’re done shopping, that notional savings figure will be an almost immaterial sliver of total spending.

Yes, everybody feels better when gas prices drop. They really benefit low-income spenders and help direct more holiday shopping to more far-flung or remote locations.

But a Christmas Miracle they ain’t.

  1. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C

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