The Fuse

JP Morgan Chase: US Consumers Spend Windfall From Lower Gasoline Prices

by R. Kress | October 28, 2015

When gasoline prices fall, Americans, for the most part, do not save the extra money but instead spend it largely on non-essentials and—in some cases—higher-priced gasoline.

When gasoline prices fall, consumers typically rejoice, and this year it’s been no different. The U.S. Energy Information Administration estimates that in 2015 the average American household will save $700 thanks to lower pump prices. But how exactly have consumers used these savings? A new study out this month from J.P. Morgan Chase examines that question. It draws on a sample of some 25 million Chase credit and debit card holders to analyze their spending behavior by tracking transactions before and after gasoline prices fell. The research seeks to predict how consumers will behave if gasoline prices remain at relatively low levels. While the report delves into the myriad areas where consumers spend this saved money, it also hints at a bigger point: When gasoline prices fall, Americans, for the most part, do not save the extra money but instead spend it largely on non-essentials and—in some cases—even increase their consumption of higher-priced gasoline.

The J.P. Morgan Chase study upends a recent Gallup poll that surveyed consumers about what they did with their savings at the pump. Some 42 percent of those surveyed said they paid their bills with the extra money, while another 28 percent said they put it into savings. Only about 24 percent admitted to spending their windfall.

U.S. consumers spend rather than save

The J.P. Morgan Chase research did not rely on consumers to report their own behavior. It instead used actual spending data from customer credit and debit cards. According to the banking giant, 80 percent of the money consumers are saving at the pump is being spent rather than being saved. What’s more, that money is not necessarily being spent on essential items. For example, the report found that roughly 20 percent of those savings was spent at restaurants.

According to J.P. Morgan Chase’s findings, 80 percent of the money consumers are saving at the pump is being spent rather than being saved.

Regionally, the impact of lower prices varied. The report found that a drop in gasoline prices had a much more significant impact on consumers in the South and the Midwest than it did on the coasts. Much of this discrepancy is attributed to a difference in income. In wealthier areas, many of which are clustered on the East and West coasts, the drop in gas prices might represent only half of a percentage point increase in purchasing power. For those with lower incomes (between $0 and $54,999), the study found that the drop in gas prices could be between a 1.1 and a 1.6 percent increase in purchasing power. For those states in higher-impact areas in the South and the Midwest, residents put their savings right back into the gas tank. This cohort increased their fuel consumption the most every time prices dipped, with fuel spending increasing by an additional 1 percent.

Amid the discussion of regional disparities, the report notes that a reduced reliance on fossil fuels would have the greatest and most positive impact on the U.S.’ lowest earners, given that they are the least cushioned against oil price volatility.

“Gas price fluctuations contribute to spending volatility. Reduced reliance on gas, for example through electrification of the transportation sector, could reduce volatility particularly for low income earners…Individuals across the income spectrum experience significant income and spending volatility and lack a significant financial buffer to withstand [it],” the report says.

Lower prices boost demand

While the consequences of a price decline may be felt unevenly in various parts of the country and at different strata of wealth, oil price volatility remains a key driver of consumer behavior—rational or otherwise.

Not surprisingly, lower gasoline prices have spurred higher fuel consumption nationwide. Overall, according to the study, some 29 percent of drivers increased their spending on gasoline when prices dropped, including some 16 percent who bumped up gasoline spending by more than 50 percent. On average, the study found that overall gasoline consumption nationwide increased by nearly four percent when prices fell.

The New York Times Washington Correspondent Binyamin Appelbaum, in his article for the Times’ section The Upshot, points out that while the price of gasoline fell by around 30 percent during the period the study examines, actual spending on gasoline fell by only 16 percent. Moreover, Appelbaum’s finding shows that Americans are using more than half of the money saved on cheaper gasoline to buy more, and potentially higher-priced, gasoline.

But one economist sees another possibility in the J.P. Morgan Chase data. Stephen Pociask, the President of the American Consumer Institute, in an email exchange with The Fuse, noted that the J.P. Morgan Chase study does not give enough details on the transactions at gasoline stations, so it’s unclear exactly what consumers are purchasing there. Could they be opting to purchase higher-priced premium gasoline instead of regular when they don’t need to? Or could they be getting their cars repaired or performing maintenance like oil changes?

“I could see someone living week-to-week on a paycheck holding off on fixing their car or buying new tires in December… Could gas stations get some big purchases when consumers have more discretionary income? I would think so,” Pociask wrote.

Appelbaum acknowledges, in his reporting, that the study does not track what kind of gasoline consumers purchased—but he does look into spending patterns during the last price collapse, which could shine a light on consumer behavior today. Drawing on additional research from a 2013 study from economists at Brown University and the University of Chicago, Appelbaum shows that during the price decline back in 2008, consumers bought more premium gasoline than they did before prices fell. When coupling the J.P. Morgan Chase data with this earlier study, Appelbaum paints a surprising picture of how consumers sometimes behave irrationally when prices fall at the pump by buying more expensive grades when they don’t need to.

Overall, the data from the J.P. Morgan Chase report provides a compelling portrait of how falling gas prices impact the American consumer. While the consequences of a price decline may be felt unevenly in various parts of the country and at different strata of wealth, oil price volatility remains a key driver of consumer behavior—rational or otherwise.