Gas prices beginning to affect consumer behaviour

Barrie McKenna
Globe and Mail
September 29, 2005

WASHINGTON -- The high price of gas already has consumers feeling a lot less confident and with another surge in energy prices yesterday, economists are watching for signs the price shock is enough to get people to actually change the way they live and spend.

"Consumers have to adjust their budgets," insisted economist Peter Morici, a business professor at the University of Maryland in College Park, Md. "Something is going to have to give."

The first hint of a consumer pullback is likely to show up in purchases of non-essential goods and services, including apparel, cars and leisure travel, according to Prof. Morici. He also predicted there would be changes in behaviour as people drive less, buy more fuel efficient cars, car pool and turn to public transit.

"We are going to see conservation in gasoline that we didn't expect," he said. "We've crossed the threshold."

Oil, gasoline and natural gas prices all jumped yesterday, on news of a decline in crude inventories in the United States and continuing fears over refining capacity. The question now is whether those high prices will radically change behaviour.

That hasn't been the pattern over the past decade, according to a report released yesterday by Statistics Canada that showed Canadians consumed a record 40.3 billion litres of gasoline last year, up nearly 17 per cent from a decade earlier.

Still, there is plenty of evidence that high energy prices are starting to bite.

Consumer confidence in the United States suffered its largest drop in 15 years after hurricane Katrina sent gasoline prices to record highs, according to report this week by the U.S. Conference Board.

Energy costs are also spooking business owners. Owners of small and medium-sized Canadian companies said they too are fretting about the economic fallout from higher fuel prices, according to a survey by the Canadian Federation of Independent Business. The study found that 88 per cent of respondents said energy prices were now a major cause of concern.

A report yesterday showed consumer strains are already turning up in credit card delinquencies among Americans. The American Bankers Association blamed rising fuel costs for a record high percentage of credit card customers who've fallen behind on their payments.

"Gas prices are taking huge chunks out of wallets, leaving some individuals with little left to meet their financial obligations," ABA chief economist James Chessen said.

The ABA said 4.81 per cent of credit card accounts were past due by 30 or more days in the second quarter, up from 4.76 per cent in the first quarter. He pointed out that the effects of hurricanes Katrina and Rita won't show up until the fourth quarter.

Gasoline for October delivery jumped 17.29 cents (U.S.) or 8 per cent to close at $2.33 a gallon on the New York Mercantile Exchange, the highest since Sept. 1. Crude oil for November delivery rose $1.28 or 2 per cent to $66.35 a barrel. Natural gas for October delivery rose $1.251 or 9.9 per cent to $13.907 per million British thermal units, the highest close since trading began in 1990.