Yesterday, the average price of gasoline in the U.S. was down to $1.99 from $3.67 eighteen months ago. Most of us immediately think of the reason is the plunging price of crude. However, since the oil itself accounts for less than half of what we pay, state and federal taxes and refinery issues matter also:
Taxes and refinery issues mean that where you live affects what you spend on gas:
Knowing where we live helps us solve the mystery of where our gas savings go.
Who Spends What On Gas
Because people in the Midwest and South do the most driving and have the lowest prices, they are enjoying the plunge the most.
You can see below that geography determined whether the decline in gas prices had a high or a low impact:
In addition to geography, the impact of the price change depends on income. For those who earn the least, the price change has the greatest impact because it represents a higher proportion of their discretionary income. Individuals in the bottom quintiles experienced the equivalent of a 2.1 percent income increase from 2013 to 2014. The income impact was much smaller for those who earn more.
All of this takes us to a JP Morgan study of the spending changes of 25 million debit and credit cardholders and then one million of what they called a core group. Very different from what we have read in the media, they conclude that we are indeed spending 80 percent of what we save on gas. But depending on where they live and what they earn, the numbers vary immensely among their account holders.
The chart below tells us where that money is going:
I guess that solves the mystery…or maybe not if the evidence accumulates that we are saving and not spending the extra gas dollars. But we will save that for another day.
Our Bottom Line: Marginal Propensity to Consume
The gas saving mystery takes us to what economists call the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). Whenever we have extra income, we can either spend or save each extra (marginal) dollar. Adding together the MPC and the MPS, the total is one. Based on the JP Morgan report, we can say that the MPC for each gas dollar we put in our pocket is .8.
But, as we have seen, since it depends on the geography and demography of many millions of people, the answer to where our gas savings are going has been a mystery.