Energy affordability trended down in first half of year

The beginning of 2016 found American consumers feeling that energy was more affordable that it had ever been since we began our systematic quarterly surveys on the topic three years ago.

As seen in the chart below, the perceived affordability of gasoline reached an all time high of 152 in January. That means that pump prices would have to rise by a factor of 2.5 before they really began to pinch the pocketbooks of the average American consumer. That month, the national average retail gasoline price was $2.06 per gallon, the lowest it had been since prices briefly plummeted in late 2008 into early 2009 during the economic meltdown.

Since then, gasoline prices have risen a bit, reaching an average of $2.41 per gallon in June and July, by when the gasoline affordability index had dropped to 104. Nevertheless, that’s still more affordable than it had been through fall 2014. Over the first year of the Energy Survey, which was launched in October 2013, U.S. pump prices averaged $3.54 per gallon, and during that period, consumers felt that gasoline was only about half as affordable as home energy.

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Consumers’ perceived affordability of gasoline rises with income, but not by as much as one might think

Results from the U-M Energy Survey give us unique insights into how consumers feel about the affordability of motor fuel, which is a major concern for many Americans. The overall gasoline affordability index — which we update quarterly in Energy Survey Indices sidebar on our home page — reflects the average view of all consumers nationwide. It blends together the responses of our diverse, nationally representative sample, averaging over their socioeconomic backgrounds as well as gender, race, age and geographic location. 

Naturally, we expect consumers’ incomes to affect how affordable they perceive energy to be. This is true in general, with higher income consumers reporting higher levels of affordability. However, we also find that the perceived affordability of gasoline does not rise as much as one might think given the large spread in household income across the population. 

The chart below shows how the affordability of gasoline varies according to the five income quintiles, where each quintile represents 20% of the population. It plots the gasoline affordability index by quintile of self-reported household income over the 11 quarters of Energy Survey data gathered to date. The patterns through time are similar to the overall trends in the affordability index as previously reported. All consumers felt that motor fuel became much more affordable after gasoline prices fell in late 2014. Perceived affordability peaked this past January, when pump prices had fallen to a national average of $2.09 per gallon. Continue Reading

Consumers feel that gasoline is a bit less affordable than they said it was last winter

The affordability index for gasoline fell by 23 points from its mid-winter value of 152, which was based on the University of Michigan Energy Survey taken in January 2016. Although by April pump prices only went up 13 cents, to $2.19 per gallon, that was enough to push the gasoline affordability index down to 129. Back in January, when the U.S. average retail price of gasoline dipped to $2.09 per gallon, American consumers  felt that gasoline was more affordable than any time since our quarterly surveys started in October 2013.
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Our affordability index is based on comparing the energy costs that consumers say they would find to be unaffordable to the actual costs — in this case, the average gasoline price — they experience when each quarterly survey is taken. As explained in our Overview of how the indices are calculated, an affordability index of 100 means that consumers believe energy prices would have to double (i.e., see a 100% increase) before they were considered unaffordable. In this context, “unaffordable” means that the energy cost has become so high that consumers feel they would need to change their day-to-day activities in some way. When consumers report that the price they find unaffordable is the same as what they currently pay, then the affordability index is zero.

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How affordable is our energy? Here’s what consumers say as of January 2016

The January 2016 University of Michigan Energy Survey finds a record high in how consumers perceive the affordability of gasoline. 

Over the past six months, consumers’ beliefs about the maximum price of gasoline that they feel they can afford has been on the rise.  The latest quarter of energy survey data — gathered from polling conducted in January 2016 — reveals a 40 point jump in the gasoline affordability index, from 112 in October to 152 in January.  On average across the United States, consumers paid $2.41 per gasoline for gallon.  Averaged across all demographic groups, Americans believe that gasoline would become unaffordable if it reached $5.48 per gallon.

Aff-indices-thru-Jan2016

A year ago, the January 2015 energy survey pegged the gasoline affordability index at 138, which was a new high at the time and reflected a large gain in consumer comfort about pump prices compared to the previous two years.  After dipping again over the remainder of 2015, the January 2016 data sets the new high at 152. Now, consumers believe that gasoline would still be affordable if its price increased by a factor of 2.5, corresponding to the 152% increase represented by the affordability index. (Background on how the the index is calculated from the survey data is given in our Affordability Indices Overview report.)

For home energy,  the affordability index of 137 in January 2016 remained similar to that of the previous quarters.  On average, survey respondents said that they paid $159 per month for their home energy. They told us that a monthly energy bill of $356 would be unaffordable. In other words, even if its cost were to slightly more than double, most Americans would still find home energy to be affordable in terms of their current lifestyle.

See our latest energy affordability report for more details.

Americans feeling much better about the price at the pump

The latest University of Michigan Energy Survey finds a 27 point increase in the gasoline affordability index; home energy affordability remains similar to what it was in the previous quarter. 

Last quarter, in July 2015, consumers believed that a doubling in the per-gallon price of gasoline would not quite be affordable. However, based on polling conducted during October 2015, the energy survey’s latest data reveal that consumers now feel that motor fuel is much more affordable. The gasoline affordability index jumped by 27 points, from a value of 85 in July 2015 to 112 as of October. Federal data show that nationwide, consumers paid an average of $2.41 per gallon in October. When we asked consumers how high the price would have to get before they thought it was unaffordable, the average response was $5.44 per gallon. The resulting affordability index of 112 indicates that, as of October, consumers believe that the price of gasoline would still be affordable even if it were to double.

Aff-indices-thru-Oct2015

Although the gasoline affordability index increased from the last quarter to the present, 112 was still significantly below its high of 138 in January 2015.

Consumers’ views of home energy affordability in October are similar to what they were over the previous eight quarters. In October, the home energy affordability index was 122, indicating survey participants believe more than a doubling in monthly costs would still be considered affordable.  In other words, consumers paid an average of $170 per month for their home energy needs and believed $342 per month would be their max affordability.

According to the latest energy survey data, Americans find gasoline and home energy to be similarly affordable, as seen in how the two trend lines nearly touch as of this past October.

See the Affordability Indices Overview for background on how each index is calculated.

Are women the fairer and more pro-environmental sex?

At the Energy Survey, we’ve examined the responses of American consumers as influenced by a number of different factors including income, geographic region and age. All of these have given us wonderful insights. However, we haven’t discussed one of the most compelling variables until now, which is gender. Based on our survey, women and men exhibit significantly different opinions, especially regarding environmental issues. This has been true throughout the ten quarters of data analyzed thus far. 

To analyze the responses to the questions that probe consumer concerns, we utilize a 4-point Likert Scale. A value of 1.0 indicates the lowest level of concern (e.g., “not at all” concerned) and 4.0 the highest (concerned “a lot” or “a great deal”). An average of 2.5 reflects a neutral group response. 

In our survey, men profess to know more about energy than women, which might suggest that men would be more concerned about the environmental effects of energy. However, the opposite is true. Although women express less confidence about their knowledge of energy, their responses exhibit a significantly greater sensitivity to its impact on the environment. 

Firstly, women are more worried about the environmental impacts of energy. While it is true that women seem to worry more about other topics covered in the survey (such as the affordability and reliability of energy), the difference between the genders is greatest in regards to environmental impact. In other words, it’s not just that women might tend to be “worriers” overall. Rather, they have a particularly elevated level of concern about the environment, at least when it comes to the effect of energy.

Secondly, despite a perceived lack of knowledge, women maintain that their energy affects the environment to a greater degree than men. Both genders believe the effect is greater than neutral, however men are much more likely to say that energy does not affect the environment at all. Although our survey does not isolate environmental professionals we suspect that — regardless of their own gender — they would side with women.

University of Michigan Energy Survey unveils two new tools to track consumer energy attitudes

Two new tools from the University of Michigan Energy Survey are tracking consumer attitudes about the cost of energy, how consumers react to changes in energy prices, and how consumer attitudes about the cost of energy changes over time.

Image source: Freestock.com

Both the Gasoline Affordability Index and the Home Energy Affordability Index grow out of  two years of quarterly surveys of a total of 3,400 Americans, who were asked how they feel about their home energy bills and what they pay to gas up their cars. The survey tracks several consumer attitudes about energy costs, including how high prices would have to climb before the household would feel the cost was unaffordable and would force a change in lifestyle to handle the increased expense.

The energy survey is a joint project of the university’s Energy Institute and U-M’s Institute for Social Research. The polls runs as part of the Surveys of Consumers, which is the source of the nationally recognized Index of Consumer Sentiment.

The gasoline index and home energy index differ from economic analysis that views energy costs as a slice of the household standard of living, and whether the percentage of income eaten up by energy costs is increasing or decreasing. Instead, the U-M Energy Survey asks a few very direct, effective and simple questions: “At what price per gallon would gasoline get so high that it becomes unaffordable to you?” and, “At what dollar amount would that home energy bill become unaffordable to you and your family?”

The definition of “unaffordable” is the point where household members would need to make significant changes to their lifestyle, such as carpooling or using mass transit or cutting back spending in other parts of the family budget to cover the cost of fueling their cars and paying their home energy bills.

Over the first two years of the Energy Survey, gas prices would have needed to increase by about 80 percent for most households before filling up the tank became unaffordable. The majority of households say that level is around $5.50 a gallon. If the gasoline index is at 0, it means consumers are on the threshold of finding prices at the pump to be unaffordable. If the index is at 100, it means prices would more or less need double before causing significant financial pain.

On home energy, the first several Energy Surveys have found that that cost would need to double before it got to the level of being unaffordable, for the majority of people surveyed. Naturally, households in the bottom third of incomes were somewhat more sensitive to price increases in both gas and home energy, and had lower limits to how high prices could climb before becoming unaffordable.

Overall, the first two years worth of survey results on gasoline and home energy – and each corresponding index – show that consumers are more sensitive to gasoline prices than to home energy costs. Partly, the Energy Survey researchers conclude, this is because consumers frequently pay home energy costs by automatic payments or through level-billing programs where costs don’t fluctuate from month to month. In comparison, gas prices are in the news every week, and consumers may be filling up their cars as often as twice a week. That makes consumers particularly sensitive to changes in the price they see at the gas station.

Americans again feeling a bit more pain at the pump

Findings based on data from 8 Quarterly Samples, Oct 2013 – July 2015

How affordable is gasoline? Consumers’ answers to that question naturally change as the price of gasoline goes up or down. And being tied to world oil prices, gasoline has the most volatile price among the forms of household energy.

To measure how consumers feel about the affordability of energy, we ask them how much higher its price would have to be before they consider it unaffordable. For gasoline, that means that the price at the pump becomes so expensive that consumers feel they would have to make changes in their household activities.

Aff-index-G-thru-Jul2015

Figure 1. Average gasoline price that U.S. consumers say they would consider unaffordable compared to the national average retail gasoline price, quarterly data Oct 2013 – July 2015

Figure 1 compares responses to that question to the average price of gasoline when each quarterly energy survey was performed. The price considered unaffordable declined over the past year, but notably much less than pump prices dropped. Averaged across all incomes, the gasoline affordability index jumps from 61 over the first five quarters of data to a mean of 138 in January 2015. It then declined as gasoline prices rose in the following months.

Consumers of different income levels have a different sense of how much they can afford to spend before a given expense seriously dents their budgets. The sensitivity of the affordability index to household income can be seen in Figure 2, which plots it according to income tercile.

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Figure 2. Gasoline affordability index by income tercile, Oct 2013 – July 2015

Consumers in the top income tercile stand out; their average gasoline affordability index of 99 indicates that the pump price would have to essentially double before they found it to be unaffordable. In contrast, the gasoline affordability index values of 75 and 67 for middle and lower income consumers, respectively, show that pump prices would not have to go up nearly as much before those households felt crimped by the cost.

 

If gasoline ever becomes too expensive, drivers say they’ll find alternatives or just drive less

Seventeen percent of Americans say that they would carpool if gasoline got too expensive. Photo credit: 511 Contra Costa (CC License)

For two years, the quarterly University of Michigan Energy Survey asked consumers about how high gasoline prices would need to climb before fueling up their cars became unaffordable. Despite some big fluctuations in prices at the pump, 40 percent of survey respondents said that $5 a gallon put gasoline out of their reach, with the majority of respondents said that $6 per gallon would simply be too much of a hit on their family budgets.

Now the Energy Survey has taken the question a step farther to analyze how American drivers would respond if gasoline prices ever do soar out of reach.

Over the first seven quarterly surveys, ranging from October 2013 through April 2015, the most common answer consumers gave was that they would start looking for other ways to get around. The second most frequent answer was that they’d simply drive less.

Less popular but still notably common options were changing to a more fuel-efficient vehicle and car pooling, the respones given by 19 percent and 17 percent of consumers on average. Just 3 percent of survey respondents said that they would not change their travel behavior and so simply bear the extra expense.

Here’s how the specific responses break down:

In spite of some drastic swings in the average price of gasoline during this nearly two-year period – with prices as high as $3.75 in June 2014 and down to a low of $2.17 in January 2015 – the level of affordability and responses on what consumers say they’d do if fuel got too expensive didn’t show much change. But in the most recent survey, when prices were the lowest they’d been in years, the number of consumers who said they would turn to different types of transportation did climb from 48 percent in previous samples to 54 percent.

Among the two most common responses to too-high gas prices, using different types of transportation and driving less did seem to be influenced by whether gas prices had dropped, risen or stayed the same. When prices went up, 51 percent of drivers said they’d turn to transportation alternatives, compared with 47 percent when prices dropped and 43 percent when gas costs remained unchanged. When gas prices remained stable, 37 percent said they’d drive less when prices became affordable, but the rate was 32 percent if prices dropped and 33 percent when prices increased.

Looking into the different levels of household income, however, found a few substantial differences. Survey respondents in the bottom third of household income said they’d be more likely to bike, walk, catch the bus or find other alternatives (55 percent), compared with middle-income drivers (50 percent) and the upper third of household incomes (40 percent).

Meanwhile, drivers in middle-income households were more likely than respondents in the top or bottom segments to drive less if gas got too expensive. Among middle-income households, 37.9 percent said they’d park their cars more if gas became unaffordable, compared with 33.2 percent of upper-income drivers and 31.5 percent of lower-income respondents.

Another notable income-related gap was in the number of households that would look for a smaller or more fuel-efficient vehicle to cope with too-high gas prices. Reflecting the burden that buying a new car puts on lower-income consumers, in contrast to the 28 percent of upper-income respondents would would switch to a vehicle that gets better mileage, the rate dropped to 18 percent among middle-income households and fell to 12 percent for households in the lower third of incomes.

Probing energy affordability

American consumers make take energy itself for granted, but they know it isn’t free. Energy costs are a part of every family’s household budget. Anyone who drives has to pay for motor fuel (gasoline for most consumers, diesel for a few). Although utility bills can sometimes be included in the rent, the vast majority of households pay at least an electric bill and many might also have additional bills for natural gas, propane or home heating oil.

In economic terms, how well households can afford energy is of course relative to their income. The U.S. Energy Information Administration tracks such data, though with a lag in reporting, revealing that home energy expenditures amounted to 2.7% of household income on average as of 2012. That’s down quite a bit from the high of 4.3% in the early 1980’s when the relative price of energy was much higher than it is today.

But what do people actually feel they can afford? That’s a psychological question rather than one of pure economics, and it’s what we probe in the U-M Energy Survey.

To assess what consumers themselves believe about the affordability of motor fuel as well as home energy, we crafted questions to explore consumers’ thresholds of energy cost pain, so to speak, by asking them how high the cost would have to become before they would find it to be unaffordable. Methodologically, this indirect approach is more reliable than directly asking “how much can you afford to pay for energy?”

Home energy

The first set of questions examined home energy bills, starting with a query to establish each respondent’s baseline, i.e., how much they have recently been paying:

Now thinking about the last time you (or someone else in your household) paid a household energy bill of any kind, how much did that bill cost you? Please do not include your water bill.

If clarification was needed, respondents were told that expenses include whatever they might pay for electricity, natural gas, propane, heating oil or other fuels use at home. If they could not remember a recent energy bill, they were asked to provide their best estimate. We next asked:

What sources or types of energy did that bill cover?

That question was then followed by:

At what dollar amount would that [type of energy stated by respondent] bill become unaffordable to you (and your family)? By unaffordable we mean that you (and your family) would be forced to make significant changes in the way you live your life.

If respondents were unable to provide a dollar value, we asked how much their bill would have to increase in percentage terms to become unaffordable. Respondents who said that their current bill was already unaffordable were asked the dollar amount at which it became unaffordable. Analyzing the responses to these three questions yields the percent increase over recent energy bills that consumers consider unaffordable. Responses averaged to a 140 (±10) percent increase (i.e., a factor of 2.4), but varied by income, home status and region.

Home Energy Affordability by Income Tercile

How much consumers say their home energy bills would have to increase to become unaffordable, by tercile of household income.

Consumers in bottom income tercile believe that home energy would become unaffordable if their bills were to roughly double, reporting an average unaffordability threshold of 102 (±15) percent. The average response of the middle income tercile was 129 (±14) percent. The level was significantly higher for top income tercile consumers, who reported that a 185 (±22) percent increase would be unaffordable. A similarly stepped pattern is found according to home ownership status, with increases of 104 (±14) percent, 130 (±19) and 170 (±22) percent seen as unaffordable by bottom, middle and top terciles, respectively, of property value. On average, renters reported that a home energy bill increase 148 (±22) percent would be unaffordable.

Western consumers view a home energy bill increase of 173 (±25) percent as unaffordable, a level notably higher than the 108 (±22) percent increase found unaffordable by Northeasterners. The South and Midwest fell in between, with bill increases averaging about 135% being seen as unaffordable.