As tensions mount in the Middle East and the demand for crude oil surges, oil prices have seen record highs. When oil prices are on the rise, increasing gasoline prices are never far behind, and the price of a gallon of gas has already crossed the $2 average in the United States.
In inflation-adjusted terms, however, the price of gas today is cheaper than it has been at several points in the past, and far from the peak levels it reached in 1981. That said, rising gas prices act similarly to a tax on consumption, and therefore do affect consumers to some degree. Results from the latest UBS/Gallup Index of Investor Optimism survey* provide some indication of the extent to which the recent surge in gas prices has affected American investors
The Impact of Rising Gas Prices
According to the May 1-16 survey, 43% of American investors report that the recent increase in gasoline prices has generated financial hardships for their households, while 57% say it has not.
Among those investors who do report some hardship because of gas prices, 25% classify the amount of hardship as "a great deal," while 51% say "a moderate amount."
Differences in reported hardship emerge when looking at the responses of "average" investors (those with between $10,000 and $100,000 in investable assets), and "substantial" investors (those with more than $100,000 in investable assets). Forty-nine percent of average investors say gas prices have caused their households financial hardships, but only 32% of substantial investors say surging gas prices have had the same effect in their households.
Where Are Gas Prices Headed?
In the past, most spikes in gas prices have been temporary with the forces of supply and demand restoring reasonable prices fairly quickly. There is reason to believe that this may not be the case for the current price hike. Some argue that China's unprecedented demand for crude, coupled with the situation in Iraq, might shift market forces irrevocably and result in a higher equilibrium price for oil.
Gallup asked investors whether they think the higher prices will be temporary or permanent; the majority, 56%, say they believe the current rise in gas prices represents a permanent shift in price levels.
If the majority of investors are reconciled to higher levels of gas prices in the future, what do they expect to pay for gas in the next six months? At the time of this survey, the national average price that investors report paying for a gallon of gas was $1.92. On average, these investors expect to be paying $2.08 per gallon six months into the future. In many areas, prices have already reached or surpassed the $2.08 level. However, this average is somewhat depressed because many investors expect to be paying lower prices for gas in the future. For example, while just 8% say they are paying more than $2.20 per gallon now, 31% expect to be paying this much six months from now.
Bottom Line
Slightly more than 4 in 10 investors claim some level of hardship as a result of higher gas prices -- and about 11% go so far as to describe that hardship level as "a great deal." Analysts are predicting that SUV sales will decline as a result of the high gas prices, and these numbers may represent enough frustration to make such a dent happen. Nonetheless, our survey indicates that the majority of American investors -- 57% -- are not yet facing the kind of hardship that would spur them to make dramatic changes to their consumption habits. For that group at least, demand should remain inelastic.
*Results for the total dataset are based on telephone interviews with 806 investors, aged 18 and older, conducted May 1-16, 2004. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.
