Thursday, January 3, 2008

Do Higher Gasoline Prices Lower U.S. Income?

Mark Thoma reads Jerry Bowyer so we don’t have to. While Mark wonders why he even bothers reading the incessant stupidity from the National Review, we ponder if there may be a way that Mr. Fuzzcharts has a point.

I think the essence of Bowyer’s argument comes down to the following claim:

Gas-price hikes will never, ever, ever cut into consumer spending. It’s a mathematical impossibility. Here’s why: Gas prices are a component of consumer spending. You see, when gas prices climb from $2 a gallon to $3 a gallon, one of the components of retail spending goes up. Gas stations are retail establishments. People make money working at gas stations (which now generally serve as convenience stores). People make money managing the corporations that own these stores. And, of course, people make money by owning shares in these companies. Sure, if people spend more money on gas, they may very well spend less on soft drinks. But that’s a substitution, not a decrease in overall spending. The spending simply shifts from one retail category to another.


Simply put – higher gasoline prices transfer income from U.S. consumers to the owners of the various chains that lead into the price at the pump. If the sole reason that gasoline prices went up was an increase in the distributor margin – then Bowyer does have a point. Mr. Bowyer’s graph of gasoline prices may have come from this source, which also shows the components of gasoline prices among the price of oil, the distributor margin, the refinery margin, and taxes. Over the January 2007 to November 2007 period shown by Mr. Bowyer, gasoline prices rose from $2.24 a gallon to $3.08 a gallon. While the distributor margin component rose from $0.13 a gallon to $0.27 a gallon, the refinery margin component fell from $0.41 a gallon to $0.31 a gallon and taxes fell from $0.46 a gallon to $0.40 a gallon. The oil price component rose from $1.28 a gallon to $2.10 a gallon. If we summed up all non-oil price components – which could reasonably be seen as domestic income components, the non-oil price components contributed only $0.02 of the $0.84 per gallon price increase.

I trust that Mr. Bowyer understands that much of our oil is imported from abroad. If so, why doesn’t he realize that this increase in oil prices represents a transfer of income from the U.S. to the oil exporting nations? It would seem higher oil prices, which drove up the price of gasoline, did lower U.S. income. Had Mr. Bowyer checked the details from his own source, he would have realized that his claim really was incredibly stupid – even for the National Review.

9 comments:

Peter Dorman said...

Right: the majority of the oil we consume is imported, so this means domestic spending falls.

But the larger point is that consumer spending is not desirable in its own right. When there is a disaster like 9/11 and our leaders tell us to go forth to the shopping malls and consume, we rightfully sneer at them. Spending per se is really not the point.

Even the most mundane economics recognizes this: the goal is consumer surplus.

From a Keynesian point of view, even if oil were all domestic, a price increase, if it is large enough and unexpected enough, can cause havoc by rendering uneconomic a portion of the capital stock. This in fact was a big part of the story of the 1970s and 80s.

coberly said...

true,

and the idea that moving the spending from one use to another leaves us all the same is also incredibly stupid, but, alas, appears to be part of standard economic theory.

wellbasically said...

Uhh, I think the idea that $3 gas is bad for the economy is what they are getting at.

juan said...

PGL; Not that this benefits most who are paying $3.00+/gallon but, on the basis of Census Bureau foreign trade stats and Institute of International Finance (IIF) capital flow information, it appears that for the five year period 2002-06 (during which the U.S. imported approx. $700 billion worth of crude oil), the Gulf Cooperation Council (GCC) alone flowed an estimated $300 billion back to the U.S., i.e. we are the world's largest recipient of petrodollars.

See: Gulf Oil Exporting Countries Boost International Investments, May 31, 2007 for a regional breakdown -
http://www.iif.com/press/press+35.php

coberly said...

wellbasically,

no, but ten dollar gas might save the planet.

Brian Derr said...

When/ where would a consumer expectations of future prices theory come into play regarding current consumer spending? An increase to $3.20/gal might simply shift spending. But could expectations of the foretold $10 planet saving gallon of gas (or even $3.50) generate decreased spending on goods elsewhere in the economy and increased attempts at savings in the present? Regardless of the chances of oil prices reaching planet saving heights, mass media's coverage of oil price fears can skew price expectations among normal individuals upwards greatly.

coberly said...

brian

i am not sure what you mean, or even what i mean.

nor am i sure "savings" is a well defined concept.

wellbasically said...

I hate to sound like a teenager who didn't get her Lexus, but how about if I just kill myself, would that make the damn planet happy?

rosserjb@jmu.edu said...

wellbasicallly,

Heck, most Europeans were paying something like $4-5 per gallon prior to the most recent oil price surges, and do not seem to have suffered all that greatly for it, although if one has spent one's time reading only the WSJ and NRO, one would think that they have been in catastrophic condition for a couple of decades.

Needless to say, quite aside from the imported oil issue, consumer spending can go down. This discussion somehow seems to imply a zero price elasticity for petroleum products. Nothing has that. Yes, short run price elasticity for gasoline tends to be pretty low, but it is not zero, and it gets more elastic the longer the time horizon. After all, the recessions after the oil prices shocks of 1973 and 1979 were not all just supply side.

Barkley