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As Prices Rise at the Pump, Might Holiday Spending Be at Risk?

November 29, 2017
Pain at the Pump this Holiday Season?
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U.S. oil prices are hovering around two-plus year highs in recent sessions and Thursday’s meeting between the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC countries might further prime the pump.

If that happens, and if history is any indication, higher gas prices could put a crimp in holiday spending. Black Friday saw record one-day receipts, according to Adobe Analytics. Adobe also predicts a fresh record for Cyber Monday online sales. A strong start, for sure, but what about the rest of the shopping season?

It depends. Consumer spending can be fickle and many U.S. consumers are in a more comfortable financial position than they were even two years ago. The recent stock market gains may be giving many newfound paper wealth, while the tight job market is giving them confidence that their jobs and job prospects are stable.

But consumer spending typically has a correlation to prices at the gas pump—even for those who don’t buy gas—and can be particularly troublesome for low- and moderate-income consumers, and those who live paycheck to paycheck.

Crude Oil Prices Rise 35%

Late last week, prices for West Texas Intermediate crude oil, the U.S. benchmark, touched a 2½-year high while Brent crude, another global benchmark, continued to sit above $60 a barrel. Since June, oil prices have advanced in the mid-35% range, making them one of the top-performing assets over the period.

There was a pullback in prices early this week as some analysts worried that the OPEC meeting may not be as productive as many had hoped. At issue is an extension to a production-cut deal that OPEC and non OPEC countries hammered out last year. Amid a global glut of oil inventories and production, the countries, (including Russia, which is not an OPEC member but a big oil producer), agreed to curb production by 1.8 million barrels a day until supply was better balanced with shrinking demand. That has largely happened and supplies have been depleted accordingly. Supplies also have been disrupted by weather-related issues and the ongoing spill-related closure of the Keystone pipeline between Canada and the U.S., all responsible for higher gasoline prices.

But the cutback deal is set to expire in March and this week’s OPEC meeting was expected to result in an extension of that agreement, according to many oil analysts. If that happens—and the daily cut stays in the 1.8 million barrels a day range—many analysts have said they expect oil prices to jump. And if that happens, prices at the pump will be affected.

Consumers Feeling the Pinch?

For every $1 change in crude oil prices, customers can expect to see a 2.4-cent-a-gallon increase in retail gasoline prices, according to the U.S. Energy Information Administration (EIA). Generally, about 50% of the price of crude oil is passed on to the consumer within two weeks, EIA has estimated. OPEC is the single, largest factor affecting gas prices, but it’s not the only one. Refining costs, distribution and marketing costs, and state and federal taxes make up about one-third of the cost, which might help explain why gas prices can be so disparate across the country. Taxes, for example, can take a big bite: California upped its state excise gas tax by $0.12 a gallon on Nov. 1 to nearly $0.42 a gallon.

So far, U.S. consumers have been absorbing an average of $0.38 cents-a-gallon year-over-year increase in costs to fill up the tank. But the prices from the highest to the lowest per state are as much as $0.97 a gallon, with Hawaii and California as the highest. South Carolina and Alabama are the lowest. On an annual basis at average prices, consumers are spending roughly $250 more than they were on gas a year ago; in 2015, when prices dropped precipitously, consumers had saved as much as $700, according to JPMorganChase Institute.

Gas prices play a significant role in how consumers feel about the economy and their own pocketbook, according to the National Association for Convenience and Fuel Retailing (NACS). In studies NACS has been conducting since 2013, it has found that gas purchases account for about 5% of total consumer spending and that prices affect even those who don’t buy gas. “Even driving past stations and seeing prices rise or fall over a period of days has an effect on one’s psyche,” NACS has said. 

Gas prices are more likely than any other factor to affect consumers’ holiday spending, according to Accenture’s recent holiday shopping survey. “Gasoline prices is the main factor negatively affecting consumers’ holiday shopping spend this year, cited by more than one-third (37 percent) of respondents—double the number who cited that factor last year (19 percent),” Accenture said. 

How might that shake out this year? The early shopping results appear to support the theory that consumers are indeed out there shopping. But can an uptick in prices at the pump take some of the merry out of Christmas? History says it might.

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