How Much Are Consumers Saving in December As A Result of Lower Gasoline Prices?

Sorry but memories of my early consulting interviews made me do it.  The interviewer would ask questions like the topic of this post and the interviewee would be expected to walk through their logic to arrive at the answer.  The interviewers didn’t care if you answered correctly only that you took a logical approach to solve it.   Funny to think about how much more quickly this question can be answered today then back in the late 1980s (dating myself).

Here is one approach to solving this problem:

  1. Number of gallons of gasoline used in U.S.:  According to the EIA, in 2013 about 368.5 million gallons of gasoline were consumed per day in the United States.  In a 31 day month like December, this amounts to about 11.4 billion gallons of consumption.  For simplicity sake, we will assume that 2014 levels are close to 2013 and that December is an average month in terms of consumption.
  2. How much has the average price of gasoline changed over the past year?  This GasBuddy 1 year chart shows that prices have dropped from $3.23 on 12/15/2013 to about $2.52 today. That is a drop of $0.71 per gallon.
  3. Taking #1 and #2 together suggests that consumers will spend about $8.1 billion less on gasoline in December as compared to last year (Analysis:  11.4 billion gallons X $0.71/gallon = $8.1 billion).

How will consumers use this savings?  Theories abound, with some comparing it to a middle class tax cut:

Lower prices at the pump, down about 60 cents a gallon from a year ago, will have the equivalent effect of cutting taxes in the U.S. by between $100 billion and $125 billion, Goldman Sachs economists said Wednesday. Americans spent $370 billion on gasoline last year.  The benefit will flow across the economic spectrum, but help the middle class most.  “As a share of total household spending, middle-income households spend the most on gasoline,” Goldman analysts wrote in a note to clients. “In other words, the drop in gasoline prices can be considered a middle class tax cut.”

It should be a rosy holiday season!