Market Insider

Rising Gas Prices May Limit Payroll-Tax Cut Savings


Rising gasoline prices could bite into any savings from the expected extension of the payroll tax cut, but for now the higher costs could be somewhat offset by lower winter heating bills.

Gas Pump
Mark Lennihan

Those heating bill savings will fade however, as spring driving season begins and by then, experts say gasoline could be over $4 a gallon.

Gasoline prices hit a national average of $3.52 per gallon this week and are already 40 cents above last year’s level.

Congress is expected to vote as early as Friday on extending the payroll tax cut—which is due to expire this month—through December. Pierpoint Securities chief economist Stephen Stanley said that should put about an extra $1000 or more in the hands of the average family.

“Typically, what they do is they take the money and pocket it. They pay down debt. In 2011, you had two things that were mirror images of each other. On the positive side, you had the tax holiday and on the negative side, you had rising gas prices which were the inverse of that,” he said, noting that this year could be the same if gasoline prices keep rising.

Gasoline prices are closely watched since they can rise quickly and have a very rapid chilling effect on consumers.

“So far the increase in gasoline we’ve see in terms of the percentage move is very similar to what we’ve seen in prior Januarys," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "I’ll start to get worried once we’re above $4 a gallon, and if it happens in the next four to six weeks, I think what’s going to happen is you’re going to see prices start to correct owing to normal seasonal behavior.”

He added: “Our rule of thumb is it’s one penny of gas is equal to $1 billion in household energy consumption.”

Tom Kloza, analyst and founder of Opisnet, said he expects gasoline to reach an average somewhere between $3.75 and $4.25 when it peaks, in late April or May.

“We’re starting to see the $4 number pop up regularly on the west coast,” he said.

Kloza said, unlike any other time, the diversity in gasoline prices across the nation is being influenced by an unusual diversity in oil prices.

He said in the upper Midwest, Minnesota for instance, a refinery using Canadian oil can purchase crude at $50-60 a barrel less than east coast refiners, which tend to use West African oil.

For that reason and because of refinery shutdowns on the east coast, the gasoline in the northeast could be among the highest priced this year.

Gasoline prices will ultimately depend on where oil prices go, and whether the situation in Iran pressures crude further.

“We’re already at Arab spring numbers,” Kloza said.

But the northeast, and other areas, has also benefited from lower fuel costs this winter, due to warm weather.

“In terms of demand, the winter was a bust,” said John Kilduff of Again Capital. “We’re 20 percent behind in terms of heating degree days.”

“I think the gasoline affect is always more important than the home heating effect,” said LaVorgna.

He said drivers who need to drive to work have a harder time changing habits than homeowners who can adjust the level they heat their homes.

Gasoline is half of the average consumer’s energy bill.

Follow Patti Domm on Twitter: @pattidomm

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