Personal Finance

Why high gas prices fall harder on lower earners

Key Points
  • U.S. gas prices are up more than $1 a gallon, on average, since the start of the year, according to the U.S. Energy Information Administration.
  • Lower-income households spend more of their budgets on transportation (and other necessities) than higher earners, according to economists.
Luke Sharrett/Bloomberg

High gasoline prices are impacting all American drivers — but low-income households bear the brunt of it.

That's because low earners funnel a bigger share of their budgets to transportation costs and other staples, like food and energy, relative to wealthier households.

U.S. gas prices had jumped to $4.32 a gallon, on average, as of March 14, up more than $1 a gallon from the beginning of 2022, according to the U.S. Energy Information Administration.

The war in Ukraine has led already high oil prices to spike, trickling down to consumers at the pump, though prices have fallen a bit from recent highs.

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"You're seeing a lot of poor people — especially the rural poor driving a lot — getting hit harder," said Kent Smetters, an economist at the University of Pennsylvania and faculty director of the Penn Wharton Budget Model.

Federal data from the U.S. Bureau of Labor Statistics bears out this pattern.

In 2019, Americans spent 3.3% of their budgets (almost $2,100) on gasoline, motor oil and other fuels, on average. (Gasoline accounts for more than 90% of this category, Smetters said.)

But those with $30,000 to $40,000 of annual pre-tax income spent a larger portion (4.1%) of their budgets at the pump, on average — about $1,700 total.

Gasoline spending as a share of annual expenditures skews downward as income grows, data show.

For example, gasoline costs accounted for 2% of overall spending for those with more than $200,000 of income, on average. That's half the share of the $30,000-$40,000 group. (The dollar total amount of spending was nearly double, at $3,300).

(While 2020 federal data was the latest available, 2019 statistics offer a more accurate analysis since the pandemic distorted gasoline consumption, Smetters said.)

The gasoline-spending trend may not seem readily apparent for the lowest earners. For example, those with less than $15,000 of annual income spent 3.7% of their budgets on gas in 2019, on average — the same share as households earning $70,000 to $100,000 a year.

However, that dynamic results from car ownership. Low earners own fewer cars, on average, and therefore fewer of those households use gasoline, skewing down the group's average expenditures.  

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"The $15,000 [group] is low-income enough that a lot of them live in urban areas and do not own a car," Smetters said.

Just 61% of households in the lowest-income group own or lease a vehicle, as do 82% of those with $15,000 to $30,000 of income. More than 90% of other households own a vehicle.

Higher earners also have more cars, on average. The lowest earners own or lease one vehicle, on average, while those earning more than $100,000 a year have nearly three.

Gasoline perspective

Robbie Goodall | Moment | Getty Images

Some may view a 2-percentage-point difference between high and low earners in the share of annual gasoline outlays as negligible.

However, here's one way to think about that difference: It's about equal to the amount of money that lower-income households spend on meats, poultry, fish and eggs, Smetters said.

"Put differently, if lower-income households could spend the same share on gas (and other fuels) as higher-income households, then lower-income households could double their intake of these proteins," Smetters said.

The 2019 expenditure data is a good indicator of spending but doesn't necessarily reflect household expenses in the current environment.

We expect gasoline to continue its slow price decline, says Lipow Oil Associates' president, Andy Lipow

Households may adjust to higher prices by driving less to limit the dent on their wallets. (That's not possible for everyone though, especially those who drive to work and can't work from home; low earners are less likely than wealthier Americans to be able to work remotely.)

The sticker price for gasoline hit an all-time this month. However, it's not a record high when accounting for inflation over the decades — most recently, prices at the pump were higher in 2008, 2011 and 2012, when gasoline topped out at about $5.31, $4.98 and $4.86 a gallon in today's dollars, respectively, according to a CNBC analysis of federal data.