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Gasoline Price Spike Has Temporary Offset

How much rising gasoline prices will pinch consumers has yet to be seen, but energy savings from the warm winter may have already helped consumers avoid some of the pain.

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Deutsche Bank chief U.S. economist Joseph LaVorgna crunched the numbers and says consumers may have seen about a third of the recent rise in gasoline prices offset by cheaper natural gas and lower utilities costs this winter.

“To me it’s really more of a usage story than a price story,” said LaVorgna. “The savings is going to be disproportionate to the people that live in the northeast...for those people that it’s impacting, it does add up to lots of dollars.”

Gasoline prices, however, are expected to continue to riseinto the spring and are expected by analysts to top out above $4 a gallon, and the benefit from cheaper heating bills will also fade as the spring approaches.

Economists are concerned that the consumer will start pulling back on other spending as gasoline nears $4 a gallon, a level it’s already reached in some areas. Certainly, as prices rise consumers also cut back on spending on gasoline, a bigger trend that has been in place over the past year. Last week alone, demand for gasoline dropped 6.4 percent from last year’s level.

From the recent low in the week of Dec. 19, gasoline prices have risen by 29 cents to an average of $3.58 per gallon, during the week of Feb. 13. Oil prices have risen about 40 percent from their October low of around $75. West Texas intermediate was trading above $105 Wednesdayon Nymex as tension surrounding Iran keeps prices high.

“Our standard rule of thumb is that a one-cent increase in gasoline pricesincreases household energy consumption by approximately $1.4 billion,” notes LaVorgna. So, the recent price jump from December through the week of Feb. 13 means household energy consumption would go up $41 billion.

“The good news is the rule of thumb may have temporarily broken down,” he says.

If consumers this quarter are spending as they did in the fourth quarter, natural gas and utilities consumption could be about $9 billion lower, LaVorgna says. In fact, he notes utilities production is off sharply in the first quarter so far, or down 16.1 percent at an annualized rate, relative to the fourth quarter.

“If we hold this level throughout the current quarter, household consumption of electricity would be down another $6 billion. This means we could see about $16 billion in less natural gas and utilities consumption, effectively offsetting about half of the recent run-up in gasoline prices—assuming gasoline prices remain near $3.58,” he said in a recent note.

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LaVorgna said the peak in gasoline is typically in May, and the impact of higher prices on the economy depends on how long and how quickly they rise.

While use is down for heating oil, as well, the price for that fuel is about 20 percent higher than it was at this time last year. So consumers using heating oil may not see a savings.

“We’re behind on degree days by 20 percent. That’s the New York area, but it’s pretty much the northeast,” said John Kilduff of Again Capital. He said there is global competition for distilled products, like heating oil, and that drives up the price, especially since Europe has had a particularly cold winter.

Natural gas prices, meanwhile, are at a decade lowand could still head lower, analysts say. LaVorgna says natural gas accounts for just 13 percent of total household energy consumption, and utilities spending is much higher, at 27 percent.

“This rise in gasoline is clearly something we want to watch, and does pose some risk,” said LaVorgna. “I think of all the things in the world now gas isn’t the worst thing if the economy is getting better, which I think it is, and if Europe stabilizes, which I think it is.”

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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