The Butterfly Effect, Coated In Oil

Earlier this week, the New York Post shouted the headline “US Credit Card Debt Nearing Toxic Levels.” The article was referring to the latest report from the Fed that in December, total consumer debt, which is the sum of both non-revolving and revolving debt, increased by 9.3 percent to almost $2.5 trillion. The increase in revolving debt, principally consisting of credit card balances, was at an annual rate of 4.1%. Thus, despite the fact that for a few short months in 2011 the amount of outstanding debt actually fell, the long-standing trend of strong expansion in consumer credit card debt returned with a vengeance in December, measured month over month, quarter over quarter, and year-over-year. We’re slowly killing ourselves with our oil addiction, and the dealer yet again is jacking up the prices.

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Well, maybe it was just a merrier Christmas; maybe people caught up in acquisition ecstasy overspent during the holidays, but then again, we have nine months to pare down those balances before Santa’s redux.

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I would really like to believe that, but I’m not sure that I do. I believe that the real reason credit card debt is increasing is because American consumers are being squeezed between stagnant personal incomes and ever-increasing prices, particularly oil prices, which affect most everything else.

Is there anyone who is still surprised by seeing the words “fuel surcharge” on bills of every description? It seems clear to me that whatever the consumer price index may say, the skyrocketing price of petroleum is starting to take a significant bite out of disposable income for many American consumers.

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Let’s consider a few facts– according to the AAA, the average price for a gallon of regular is today about $3.72 (the highest ever recorded at the end of a February), as compared to about $3.39 only a month ago. The AAA’s most recent figures for American gas consumption show that the average driver travels about 1000 miles a month, with average fuel economy of about 22 miles per gallon. Therefore, the average American uses about 45 gallons every month, which means that he or she will spend about $14.99 more on gasoline this month as compared to last. This number, which is less than the price of two adult movie tickets, might not sound like a lot, but it adds up, especially when you multiply it across the nation.

Make no mistake: changes in gas prices have a profound psychological impact on consumers. For instance, one way that drivers deal with increased gas prices is to switch from higher-grade gasoline to lower octane. In a recent University of Chicago study, researchers found that consumers are far more sensitive to changes in gas prices than they are to the price fluctuations of other commodities, like orange juice and milk. The study found that drivers in fact, treated a $1,313 loss in net income from higher gas prices as if their households were making $100,000 less a year.

And now, once again, oil prices are spiking. If you haven’t noticed by looking at the sign above the gas pump, price hikes are becoming so bold and fluid — please excuse the pun — that recently the numbers on a gas station roadsign changed in the middle of a live television report, you could easily tell by the promises coming from various political figures. “Gas for two dollars a gallon!” “Gas for $2.50 a gallon!” “Don’t worry folks, the Saudis will simply up production in an amount equal to the shortfall resulting from a problem in Iran, if any…”

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Right now, most experts agree that the most important driver of the price of oil–the world’s most globalized commodity–is the threat of a major disruption in Iran. Those of us who are old enough may well recall that the cause of the energy crisis in 1979–and those long gas lines where Americans idled away as much as 150,000 gallons a day just waiting for an accommodating pump–was a “disruption” in Iran. That was bad enough, but, of course, times have changed since then. During the oil shortages of the 1970s, the US was — relatively speaking — much richer. We were not only the country that needed the most oil — we could also better afford to pay for it than anyone else. But today, dramatically escalating consumption in the East, particularly in China and India, means that there are people out there who need as much or more of it than we do. And in China, there is a quite substantial ability to pay for it. In fact, China provides massive subsidies to its state oil companies principally to improve their position in jockeying for reliable and reasonably-priced supply around the globe.

So if a butterfly can flap its wings in Tokyo and cause a hurricane in Brazil, what is the effect of millions of consumers having to flap open their wallets at the pump more? If, as the University of Chicago researchers and others have shown, consumers essentially “overreact” to the price of gas relative to its actual impact on their income, what is that cumulative downward drag going to do to the economy?

Bottom line, part one: the reason candidates of every stripe are promising Magical Mystery solutions to the problem of high gasoline prices is because those prices are political dynamite in an election year. If the price of regular increases by another dollar a gallon–hopefully improbable but certainly not impossible–all those credit cards that are used at all those gas pumps will be paying $60 a month more than they did in January of 2012. I can’t do the numbers, but I’d bet that gas prices like that will put a lot of American consumers above their debt limit on a whole lot of credit cards. Moreover, prices like that would be a significant drag on an economy that is already exhibiting not enough momentum and too much friction. And, what would happen if there simply wasn’t enough gasoline to go around? There is no one in American politics on either side of the aisle who wants to deal with a question like that before November of 2012, so you’ll probably hear many more promises. But…

Bottom line, part two: there is no one in Washington — or for that matter in Beijing or Moscow or Riyadh — who can directly prevent a short-run catastrophe in the form of gasoline prices in Paris, Ohio that look a lot like gasoline prices in Paris, France. There is no amount of drilling, limitations on speculation, lengths of pipeline, or jawboning that can forestall a crisis if the major players — who are all in Tehran or Tel Aviv — do something that precipitates another “disruption” in Iranian oil production. All that anyone else can do is to attempt to influence, with either a carrot or a stick, what happens over there.

So you might as well get used to it–no one can do much in the short term about the high price of gasoline. But you the consumer can do something to protect yourself against it, and that’s really your only sane course of action. Forget about promises of lower prices, and stop worrying about who does what to whom somewhere in the Gulf. Oil is a matter of macro concern but your finances involve very micro considerations. Pick a day or two a week where you simply keep your credit card in your purse or wallet. Save money wherever you can, but save oil everywhere you can. Replace the SUV with a hybrid when your lease expires or you get ready to replace the gas guzzler. Turn down the heat, turn off the lights, and curtail the buying of things that come packaged in plastics produced with petroleum. Can you imagine what would happen if we all decided to flap our wallets shut more often? After all, the butterfly effect goes both ways.

Image: wikiHowl, via Flickr

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