Pumping savings into the economy

There are very few products or services that impact, in one way or another, nearly every consumer in the United States. One product that does is gasoline. Since the end of 2014, the consumers in the U.S. have experienced a steady decline in the price of gasoline, down from $3.52 in July 2014, to the current national average of $1.72. ¹ The drop in gasoline prices has sparked debate among economists as to whether or not lower energy costs are an overall positive or negative for the economy. While both sides have staked their claims and can produce evidence to support some of their arguments, one fact remains true: the drop in gasoline prices has led to fairly significant savings for U.S. consumers, and those savings are flowing back into the economy.

Lower Gasoline Prices are a Positive for Most Consumers

It is estimated that individual consumers saved between $540 ² and $700 ³ in gasoline-related expenses in 2015. This savings had a significant effect on the spending power of individuals. A study of more than 25 million debit and credit card users found that individuals were spending nearly 80% of the “extra” money they had due to the savings incurred from lower gasoline prices. ⁴ Instead of being spent at the pump, this “extra” money was able to flow into other sectors of the economy, to the tune of an estimated $5.86 billion in Florida in 2015 alone, generating an additional $350 million in sales tax revenue. ⁵ In particular, the study shows that nearly 20% of gasoline savings were spent at restaurants alone. ⁶ This helped fuel a record year for restaurants as Americans spent more money eating out than at the grocery store for the first time in history. ⁷ Consumers also spent some of their gasoline savings shopping, as industries such as entertainment, electronics, appliances and department stores all saw added revenue due to the increase in expendable income. ⁸ The overall benefits to individuals in the U.S. is upwards of $140 billion as a result of the drop in gasoline prices. ⁹

Who Is Impacted the Most

While the fall in gasoline prices leads to savings for everyone, the impact is greater on those who are more susceptible to changes in their income. For example, the two groups of society most greatly impacted by the decrease in gasoline prices are the lower two income quartiles, or those in the bottom 40% of income earned. This is due to the fact that these individuals spend the highest percentage of their monthly income filling up their car (5.6% for quartile 1 and 4.1% for quartile 2). ¹⁰ Some estimates show an even greater impact for lower-income households. In 2012, it was estimated that households earning less than $50,000 spent approximately 21% of their after-tax income on energy costs associated with oil (including heating oil). ¹¹

With the decline in energy costs, these individuals stand to benefit the most. One study estimates that those individuals in the lowest income quartile experienced what is equivalent to a 1.6% increase in income, more than 3 times the impact lower gasoline prices had on the highest quartile (the top 20 percent of income earners). ¹² The benefit from energy savings comes at a crucial time for middle- and lower-income earning individuals because these segments of society have not seen significant wage gains in recent years. ¹³ The savings instead act as a pseudo wage increase that helps boost consumer sentiment, giving middle- and lower-income individuals some much-needed expendable income. ¹⁴

» Next page: Oil prices and the stock market; Conclusion

¹ Gasoline and Diesel Fuel Update. U.S. Energy Information Administration; Also see: AAA website:
² Americans saved $540 on gas this year. CNN Money. October 2015.
³ U.S. household gasoline expenditures expected to fall in 2015. U.S. Energy Information Administration. April 2015
⁴ How Falling Gas Prices Fuel The Consumer: Evidence from 25 Million People. JPMorgan Chase & Co. October 2015.
⁵ Florida Legislature Office of Economic and Demographic Research. Florida: An Economic Overview. August 26, 2015.
⁶ How Falling Gas Prices Fuel The Consumer: Evidence from 25 Million People. JPMorgan Chase & Co. October 2015.
⁷ Americans’ Spending on Dining Just Overtook Grocery Sales for the First Time Ever. Bloomberg Business. April 2015.
⁸ How Falling Gas Prices Fuel The Consumer: Evidence from 25 Million People. JPMorgan Chase & Co. October 2015.
⁹ Why Cheap Gas Might Not Be Good For The U.S. Economy. NPR. February 2016.
¹⁰ How Falling Gas Prices Fuel The Consumer: Evidence from 25 Million People. JPMorgan Chase & Co. October 2015.
¹¹ Lower Gas Prices: How Big A Boost for the Economy? The Wall Street Journal. December 2014.
¹² How Falling Gas Prices Fuel The Consumer: Evidence from 25 Million People. JPMorgan Chase & Co. October 2015.
¹³ Lower Gas Prices: The New Wage Increase. Newsmax. December 2014.
¹⁴ Ibid.

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