Introducing the Energy Affordability Index

The University of Michigan Energy Survey has developed a new way to measure how affordable Americans think energy is. Based on responses to questions that elicit consumers’ individual feelings about what they pay for home energy and gasoline, we compute an index that reflects how high an energy expense would have to rise before their household would find it unaffordable. In this context, “unaffordable” doesn’t mean that the consumer could not afford to buy gasoline at all, for example. Rather, it means that the price has gotten so high that the consumer believes they would have to make changes in their lives (drive less, for example) because of the cost.

We modeled the energy affordability index on the widely reported index of consumer sentiment generated by the University of Michigan Surveys of Consumers (“SCA”). The energy survey is conducted as a quarterly rider on that long-running monthly survey. Adopting the methods used by the SCA, the energy survey probes consumers’ personal cost thresholds by asking respondents how their high energy expenses would have to go to become difficult to bear. This psychological rather than economic approach provides a clear picture of what consumers really feel about the issue at any given point in time.

An affordability index of zero indicates that consumers already feel that the given energy expense is unaffordable. An index value of 100 indicates that consumers believe the cost of energy would have to double before they would view it as unaffordable.

This initial report on the energy affordability indices is based on two years of quarterly survey data, comprised of eight samples starting in October 2013 and gathered every three months through July 2015.

Over this two-year period, the average affordability index for home energy was 125, indicating the Americans on average believed they they could afford more than a doubling in their home energy costs. Gasoline, however, is viewed as significantly less affordable than home energy. The average affordability index for gasoline over the past two years was 80, meaning consumers on average would find motor fuel to be unaffordable at a price notably short of twice what they’ve been paying.

The home energy affordability index was fairly stable over this period. That’s in contrast to the situation for gasoline, where the affordability index increased as the price fell in the second half of 2014 and early 2015 before rising again this past summer.

For more about these new results on on energy affordability, download the report:
How Much of an Increase in Home Energy and Gasoline Costs Do People Think They Can Afford?

For further details on the method, see Energy Affordability Indices: An Overview.

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.

Aff-index-G-by-income-thru-Jul2015

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.

 

What if gas became unaffordable? Americans say they are most likely to use different transportation

ANN ARBOR — This summer, in most parts of the country, average pump prices have been nearly a dollar per gallon lower than the previous three years. But the price of oil can be quite volatile, and so what do consumers say they’d do if gasoline became unaffordable?

Personal vehicles are a staple form of transportation for most U.S. consumers, whether for traveling to work or escaping to distant places. Moreover, cars have a long-standing symbolic link with Americans’ sense of independence. Not surprisingly, pressures to reduce car use often evoke psychological resistance.

at-5-69-on-dark-skySince its inception in October 2013, the U-M Energy Survey has asked a representative nationwide sample of consumers, in an open-ended format, about what they would do differently to get around if gasoline prices reached a level that they thought would be personally unaffordable. In a separate question, the survey asked what level pump prices would have to reach before they were viewed as unaffordable, and the average answer has been in the range of $5.50 to $6.00 per gallon.

Averaging across the past seven quarters of data (October 2014 through April 2015), the survey respondents who own a personal vehicle consistently reported the most willingness to use different modes of transportation (e.g., public transportation, biking, walking). Such a response was given by almost half (47%) of those surveyed. The next most common response, given by 34% of consumers, was that they would drive less (34%).

Other responses to the question were driving a smaller or more efficient vehicle (19%) and carpooling (17%). Fewer (9%) reported that they would consolidate the number of times they drove (combine trips). Very few (3%) said that they would not change their travel behavior.

The nearly two-year period examined by the U-M Energy Survey to date saw some notable swings in gasoline prices, with the national per-gallon average ranging from a high of $3.75 in June of 2014 to a low of $2.17 this past January. Nevertheless, most responses to the travel behavior question changed little over this period. The only notable change was in the most recent sample (April 2015), when a significantly greater proportion of respondents (54%) said that they would use different transportation (compared to 48% or fewer consumers in previous quarterly samples).

Digging deeper into the data, we do find a greater difference in how consumers say they would alter their travel behavior based on self-reported income. Consumers in the lowest income bracket were more likely than those in the middle and top brackets to say they would use different transportation (55% vs. 44% and 40%). Respondents in the middle income bracket were somewhat more likely than those in the low and top brackets to say they would drive less.

Notably, consumers in the lowest income bracket were least likely to say they would drive a smaller or more efficient vehicle. A car with higher gas mileage per gallon would reduce a consumer’s driving costs; however, a limited family budget is a clear barrier to acquiring a different vehicle.

For a closer look at the data, download our technical brief on this topic.

###

The U-M Energy Survey is administered four times a year through a set of questions added quarterly to the Thomson Reuters/University of Michigan Surveys of Consumers, conducted by ISR since 1946.

University of Michigan Energy Institute
The demand for economically and environmentally sound energy solutions is urgent and global. The Energy Institute builds on the University of Michigan’s strong energy research heritage at the heart of the nation’s automotive and manufacturing industries to develop and integrate science, technology and policy solutions to pressing energy challenges.

Institute for Social Research
Established in 1949, the University of Michigan’s Institute for Social Research is the world’s largest academic social science survey and research organization, and a world leader in developing and applying social science methodology, and in educating researchers and students from around the world.

Thomson Reuters/University of Michigan Surveys of Consumers
Based on telephone interviews with 500 U.S. households conducted every month, the U-M Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected.

Contact: Amy Mast, 734-615-5678, amymast@umich.edu

What if gasoline became unaffordable?

Personal vehicles are a staple form of transportation for most U.S. consumers, whether for traveling to work to escaping to distant places. Moreover, cars have a long-standing symbolic link with Americans’ sense of independence. Not surprisingly, circumstances or events that make it more expensive to drive can increase consumer anxiety, or at least increase their irritation. But what if the cost of driving — which on a day-to-day basis is determined by the price at the pump — reached a point where consumers felt they had to change the way they get around?

Since its inception in October 2013, the University of Michigan Energy Survey has asked U.S. consumers, in an open-ended format, about what they would do differently if gasoline prices reached a level that they thought would be personally unaffordable. Although in recent months the national average price of gasoline has been nearly a dollar per gallon lower than it was over the prior three years, fuel prices can be quite volatile. The possibility that pump prices might go up certainly lurks in everyone’s mind, and so understanding what consumers might do if gasoline became unaffordable can shed light on this important aspect of energy-related decision making. how-change-get-around_thru-apr2015

We analyzed the responses to such a question over the past seven quarters of cross-sectional data (October 2014 through April 2015). On a national average basis, Americans who own a personal vehicle consistently reported the most willingness to use different modes of transportation (e.g., public transportation, biking, walking).

That’s the longest bar in the accompanying chart, showing that almost half of consumers (47%) indicated they would use different transportation. The next most common response is that of the 34% consumers who said that they would drive less if gasoline prices reached a level they consider unaffordable. Less common responses, although expressed by a sizable number of consumers, were driving a smaller or more efficient vehicle (19%) and carpooling (17%). Fewer (9%) reported that they would consolidate the number of times they drove (combine trips). Very few respondents (3%) said that they would not change their travel behavior.

We also examined how the answers to the question broke down according to income. To read the full report, click the DOWNLOAD link at the top of this post.

Low gasoline prices do not seem to change what consumers feel they can pay

This past January brought the lowest gasoline prices that the country had seen in nearly six years. The national average gasoline price was $2.27 per gallon that month and many parts of the country saw pump prices below two dollars. Gasoline is clearly more affordable than it had been, but does the price drop affect what consumers think they can afford?

Businesses and policymakers might wonder whether people get comfortable with a given price range. In other words, would consumers think they can afford more once they get used to a price rise or, conversely, do they feel they can afford less when the price drops?

Two of the questions asked in the University of Michigan Energy Survey probe consumers’ “thresholds of pain” when it comes to energy prices. One asks how high gasoline prices would have to get before consumers felt it would cause them to have to make adjustments in their travel decisions. A similar question examines the limits of affordability for home energy, such as monthly electric and heating bills. This chart shows how the answers for gasoline price since the U-M Energy Survey started in October 2013 compared to actual national average pump prices over a similar time frame.

gasoline-unaff-vs-avg-price-thru-jan-2015The upper (red) curve shows the average responses to our question about how much gasoline would have to cost before consumers would find it unaffordable in the sense of greatly crimping their household budgets. This threshold averaged $5.61 (±0.08) per gallon over the six quarterly samples of October 2013 to January 2015. Although there is a hint of decline, it was not statistically significant even as pump prices plummeted in the months leading up to this past January. So even as consumers enjoy lower costs, their views of the price at which gasoline would become unaffordable have not really changed.

What has changed is the difference between the most that consumers feel they can afford—that is, their threshold of serious pain at the pump—and the price they were paying when we conducted the survey. The gap between those two prices provides a measure of how consumers themselves perceive the affordability of gasoline.

Our full report on this issue examines the responses on this question in more depth. It also compares what consumers say about the price of gasoline to their views on home energy bills, which have not seen the price fluctuations seen in motor fuel markets over the past several years. The report can be downloaded via the button at the top of this post.

 

 

 

 

$6 per gallon would be too much for gas

U-M Energy Survey finds that most consumers wouldn’t make big changes in how they drive until gasoline prices rise increase by more than 80%

If the price of a gallon of gas ever gets close to $6 a gallon, the cost of filling the average mid-size car will go to nearly $96 per tank. That’s also the point where most Americans say gas would be unaffordable, according to the latest University of Michigan Energy Survey.

With the national gasoline price averaging $3.39 per gallon in January 2014, when the 18-question U-M energy survey was taken, it would take a price hike of 83 percent to push average prices to $5.96 per gallon before gas became too expensive for survey participants. That cost didn’t vary significantly from the $5.90 estimate U-M researchers found in their inaugural October 2013 survey.

$6-a-Gallon-Would-Be-Too-Much-For-Gasoline-INFOGRAPHIC4

That price level would be more than 50 percent higher than gas has ever been in the United States. The average national annual price of a gallon of regular fuel, adjusted in constant dollars for 2015, peaked at $3.80 in 2008, according to the U.S. Bureau of Commerce.

“Unaffordable” was defined as the point where gas prices became expensive enough to prompt drivers to make significant changes in when and where they drive.

The latest survey also reveals that consumers remain much more sensitive to increases in gasoline prices than in the cost of energy used to power their homes. While survey respondents said they’d find gas unaffordable after a price increase of more than 80 percent, the same survey participants said their home energy costs would need to more than double, increasing by at least 130 percent, before they’d start making big changes to cut costs.

The point at which a fill-up becomes a financial downer varies by household income and other factors, the survey revealed, a trend also seen in the October survey. Top income earners said that gas prices would have to get much higher to become unaffordable as compared with middle- and lower-income households.

The point at which gas becomes affordable for households in the top third of incomes is $6.75 a gallon, according to the January survey, while households in the middle and lower thirds of income pegged that price at an average price of about $5.50 per gallon. The same kind of split was seen between consumers who owned homes in the top third of property values versus those in the middle and lower segments.

U-M researchers were able to identify how many consumers already find gasoline to be unaffordable. That figure was about 3 percent of all survey participants, and didn’t show any significant changes across incomes, home values or ownership, or regions of the country

The unaffordability level rises to 12 percent when survey participants were asked where they think gas prices will head during the next five years. In January, respondents said they felt prices would rise to an average of $3.72 per gallon, 10 percent higher than the $3.39 per gallon national average at the time. Looking at income levels, 5 percent of respondents from higher-earning households said gas would be unaffordable for them in five years, compared with 18 percent of participants in the bottom third of household incomes