What is gas-price tipping point?


Gas prices are reaching the point where drivers are cutting back.

NEW YORK (AP) — Florida dental products salesman Jean Laborde doesn’t take as many fishing trips as he used to. Student Kaitlin Kelly has started carpooling to work and school in New Jersey with friends.

Across the country, people already struggling with rising food prices, weak wage growth and falling home values are finding ways to manage the soaring cost of gasoline. They’re combining errands, sharing rides, eliminating pleasure trips and using public transit more.

With these changes, U.S. consumers caused a remarkable 1 percent drop in gas consumption the last eight-week period over a year ago. Gas use should be rising 1.5 percent annually just to keep up with the population. The last time a drop that length was recorded was in early 1997.

As gas prices rose to $2 a gallon and $3 a gallon, Americans were expected to trade their sport-utility vehicles or drive less, but the strong economy kept pumps busy. When gas prices hit a record $3.23 a gallon last May, Americans shrugged it off as another temporary spike, but that was before the economy spiraled downward.

Things are different now that the economy has soured. Sharply higher prices for food and other basic goods and weak home prices that limit the ability to cash out equity for spending money are wearing consumers down.

“In the past, their budgets weren’t being attacked from all sides,” said Joel Naroff, an economist and president of Naroff Economic Advisors in Holland, Pa. “People are adjusting not only to the rising price of gasoline, but now the soaring price of food.”

With pump prices averaging $3.28 a gallon and expected to peak between $3.50 and $4 this spring, the question becomes: When will drivers begin using significantly less gas? And once we get there, will prices fall?

Experts point to California for one answer. Last November, demand plummeted by 3.7 percent as gas prices soared past $3.40 a gallon — 30 cents over the national average.

That drop is extraordinary, considering gas consumption normally grows about 1.5 percent year-over-year just to keep up with the population, said Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service in Wall, N.J.

Part of the downturn came from low-income consumers staying home or taking public transport, but the sharp downturn in the state’s economy played a part, said Chris Thornberg, a former UCLA economist who now runs his own forecasting firm, Beacon Economics, in Los Angeles.

The country as a whole, meanwhile, drove slightly more in November than it had a year earlier; of course, gas prices averaged only $3.07 a gallon then.

That indicates some consumers begin changing driving habits between that price and $3.40 a gallon.

The tipping point in this weak economy appears to be “somewhere north of $3.25 a gallon,” Kloza said.

The level at which gas prices force households to cut back is subjective and comes sooner to lower-income families. But there’s evidence we’re already at a point where average consumers are cutting nonessentials or “trading down” to cheaper brands.

“It’s affecting consumer confidence because it’s becoming more and more difficult to sustain the standard of living,” Naroff said.

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