The price of oil plunged today, down more than $9 to $99.60. But the largest one-day drop in oil prices since the height of the financial crisis is unlikely to stop talk that high gas prices could kill the recovery.
According to the oil price spike of 2008, whenever gas prices hit $4 a gallon, the economy flips out. Sticker shock at the pump cuts deep into fuel demand, as consumers scrap superfluous driving. Americans opt for ‘staycations’ in lieu of far-flung family adventures, and they swap out gas-guzzling trips to the mall for evenings at home with their TV. The shifts in consumer behavior add up to bad news for big box retailers, whose sales drop as their stuff gets pricier because of higher input costs and consumers staying home.
Not so this time around. Pump prices around the country have been approaching the $4 mark this week, averaging $3.985 nationally today. Gas prices tend to lag oil price swings by a few weeks, but if the oil price drop is temporary (which is likely, given rising demand from emerging markets and steady oil production in non-OPEC countries), high gas prices may stick around.
And yet consumer spending hasn’t flinched. Big retail chains today reported an 8.9% surge in sales in April versus a year ago, which ties with March as the largest monthly gain on record over the past 11 years.
What gives? A recent study by a pair of economists at Brown University and the University of Chicago’s business school may shed some light. The study, which looked at data on consumer purchases at a large grocery chain between 2006 and 2009, found that gas price hikes prompted consumers to cut back on fuel by downgrading their gasoline type (from, say, ‘supreme’ to ‘regular’), but it didn’t lead them to pare down on other grocery store buys to make up for higher fuel costs. That suggests people aren’t good at budgeting across spending areas, even when a big-ticket item like gas has them feeling the pinch.
And consumers are finding new ways to spend the money they save on gas elsewhere. E-commerce grew nearly 20% in April as consumers made fewer trips to the mall, its biggest jump in almost four years, according to a new report out by MasterCard Advisors. If Americans keep on spending with or without their cars, gas prices may not mean that much to the U.S. recovery after all.