The price of gasoline, as you’ve probably noticed if you sit behind a combustion engine, has dropped incredibly over the last year or so.
What do people do with all the money they saved? For many people, they buy more gas, according to a study from JP Morgan Chase Institute (pdf).
Last winter, for example, the average American would have saved about $41, thanks to the lower gas prices, but the survey said the average American saved only $22. And many people didn’t spend less on gas at all.
Between the High Price period and the Low Price period, the average person saw a $22 decrease in gas spending, but there was again significant variation among individuals. 62% of all individuals decreased their gas spending, including 23% of people who decreased their gas spending by 50% or more.
Nine percent of people saw no change in their gas spending, and 29% increased their gas spending, including 16% of people who increased their gas spending by more than 50%.
Again, we find similar degrees of variation in the change in spending on gas when we examine only individuals who showed any gas spending in the High Price period. Among this sample, 71% of people spent less on gas in the Low Price period compared to the High Price period, and 27% decreased their gas spending by more than 50%. The remaining 29% increased their gas spending, including 14% who increased expenditures on gas by more than 50%
This is likely to be a great disappointment to economists, who predicted the lower gasoline prices would give consumers more cash to spend somewhere else. And while drivers are spending some of the money at restaurants and on consumer goods, they’re giving the oil companies more of that money by driving more or buying a more expensive blend of gasoline.
The New York Times provides psychological insight into what’s going on here:
Researchers have found that people treat money as earmarked for particular kinds of spending, a tendency behavioral economists call “mental accounting.” If someone is buying rounds at the neighborhood bar, people tend to treat the money they didn’t spend as “beer money,” and sooner or later they tend to spend it disproportionately on beer.
As a result, they end up drinking more beer than they had originally intended.
The newspaper says the increase in gasoline consumption “is not sufficient to explain the entirety of the increase in spending on gas,” suggesting that people are buying premium gasoline when regular unleaded will do just fine. It calls such a decision “irrational.”