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Rising Gas Prices Have Huge Psychological Effect On Consumers

Ryan Shaw |
March 10, 2012 | 8:27 p.m. PST

Staff Columnist

(marsmet501, Creative Commons)
(marsmet501, Creative Commons)
Rising Gas prices affect not only our wallets, but they also affect our minds. Psychology plays a key role in the way consumers react to rising gas prices.   

When gas prices rise, the price of everything else rises along with it. The cost of things people buy every day, like groceries, rises, and the increasing costs of vacations and family visits start to become too much for many families to be able to pay on a limited budget. Perhaps the hardest for consumers to stomach is the rising cost of transportation to and from work. 

When it costs more to get to work, take-home earnings go down. It’s like taking a pay cut. So a guy earning $15 per hour on Monday only makes $14.75 per hour on Tuesday because his local gas station raised the price by 25 cents overnight. What can he do about it? Not a damn thing. 

I guess Republicans would tell him to be thankful he even has a job, and Democrats would tell him to buy a $30,000 hybrid vehicle. Neither pieces of commentary would likely help him at all.      

It now costs an average of $3.758 nationwide for a gallon of gas. These prices are projected to rise even higher as the summer months approach. According to Associated Press reporter Chris Kahn,

“OPIS [Oil Price Information Service] forecasts that average gasoline prices will rise as high as $4.25 per gallon across the country by late April. That would top the record high of $4.11 set in July 2008 and keep gasoline center stage during this year's presidential election.”  

On the west coast, prices are well over $4 per gallon. In economic terms this means household discretionary spending will drop—less money for retail purchases on durable and non-durable goods. In short, households have less money to spend on non-essential items. Many households cut out spending on non-essentials altogether. 

The psychological effects of households strapped for cash might have the biggest effect on consumer spending habits. 

Seeing gas prices rise above $4 per gallon is scary for a lot of people. According to David Rocks at Bloomberg Businessweek

"According to Credit Suisse, each 1 cent uptick in gas redirects about $1 billion of consumer spending away from other good over the course of a year. This means that a 50 cent increase in gas would only direct about 1 percent away from retail spending." 

Despite this, people still feel as if they are spending all their money on gas. Vacations may be cancelled as a result, and states that depend on tourism especially will be negatively impacted. The anticipation of apocalyptically high prices at the pump will keep families stashing away their cash, and holding off on purchases.

Doomsday bloggers on the right are only contributing to these fears, causing consumers to be even more careful about their spending. 

If people are afraid that gas prices may hit $6 or $7 per gallon, they are going to save whatever left-over money they have, and this will slow consumer spending to a grinding halt, even if the prices never actually get to that price. Hey Newt, you may be right about future gas prices, or you may be wrong. Either way, you’re only making things worse by talking in such a rapture-like tone.

 

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