Falling gas prices have been a welcome economic reprieve over the past year or so. This week, the average price of gas in the U.S. is $2.066 per gallon, according to the EIA, which is actually up $0.059 from a week ago, but still down $0.382 from a year ago. This low average price is largely due to falling oil prices over the past couple of years — WTI averaged $38.32 per barrel in the week ended March 18, still lower than this time last year, when the price sat at $44.39.
Falling gas prices are a windfall for the economy because most Americans spend a huge amount of money on gas. According to the EIA, the average American household spends about 4% of pretax income on retail gas, which worked out to $2,912 in 2012. With just over 115 million households in the country, that’s more than $336 billion, 2.2% of GDP. According to the BEA, we spent even more than that — $421.6 billion in 2012 and $408.7 billion in 2013, about 2.4% of GDP. That’s more money than we spend on Medicaid ($265 billion) and not much less than we spend on on Medicare ($492 billion); it’s more than half of what we spend on defense ($626 billion).
So when gas prices fall, we feel it in our wallets. All of a sudden, because of some meandering, nebulous economic force, Americans have more money to spend on other stuff. This is particularly because wages for most Americans have stagnated and the all-important middle class is dissolving. Right now, the few extra bucks we’re saving at the pump can go a long way.
(Future dates in the chart below are forecasts from the EIA.)
What you’re paying for in a gallon of gas
The price of gas is linked primarily to the price of oil. According to the EIA, crude oil accounts for 62% of the cost of a gallon of regular gasoline. This is the same crude oil whose per-barrel price is often used as a macroeconomic indicator, and its relationship to retail gas prices is one of those reasons. The petroleum market is the beating heart of the energy industry.
When crude oil prices fall, upstream businesses and business units suffer — the price of their product is declining. But cheaper crude oil means downstream companies, those that refine crude oil into consumer-friendly gasoline, have cheaper input costs. Lately, downstream services like this have been bright spots in an otherwise turbulent energy market. Refining accounts for 14% of our costs at the pump.
Distribution, marketing, and taxes make up the remainder of the cost.