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.

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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.

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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.

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.

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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.

 

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.

Consumers’ intensity of concern regarding energy impacts

Our samples to date suggest that consumers’ degree of concern about the impact of energy on the environment equals their concern about the affordability of energy, while there is much less concern about the reliability of energy. Combined data from a year’s worth of sample points (October 2013, January 2014, April 2014, and July 2014) show that the share of respondents that worry a great deal or a fair amount about this aspect of energy averages 59% whereas those that worry a great deal or a fair amount about the affordability of energy averages 55%. Trailing both of these (significantly) is concern about reliability at 32%. The equality of concern about environmental impact and affordability could be an artifact of how the data are collapsed. Do consumers really worry about environmental impact as much as they worry about affordability? This note addresses this issue.

Respondents were asked a series of questions about their degree of concern about three energy-related issues:

“How much do you personally worry about the reliability of energy? Would you say a great deal, a fair amount, only a little, or not at all?

How much do you personally worry about the affordability of energy? Would you say a great deal, a fair amount, only a little, or not at all?

How much do you personally worry about the environmental impact of energy? Would you say a great deal, a fair amount, only a little, or not at all?”

These questions were posed near the end of the interview so that the respondents had already become familiar with the aspects of energy being addressed. To measure these attitudes, we used a balanced four-level scale.

Consumers say home energy prices heading up

During the next five years, home power bills will rise by 30% but won’t become unaffordable, participants tell U-M Energy Survey

Energy consumers say they think the cost of powering their homes will rise by an average of 30 percent during the next five years, but that increase won’t be so high that it makes it unaffordable to heat, cool and light their homes, according to the latest University of Michigan Energy Survey.

The 18-question January 2014 survey from U-M finds that consumers who rent or are in the lower third of household incomes expect to see the biggest jump in home energy prices between now and 2019. Renters said they expect the increase to be nearly 50 percent, while low-income households predict an increase of about 40 percent. Respondents from both middle- and top-income households said they expect home energy prices to climb by about 25 percent.

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The responses indicate that consumers at all income levels expect to see their home energy prices increase much faster than the rate of inflation. Long-run historical inflation averages 3 percent a year, or 3.5 percent compounded over five years, a much smaller hike in prices than even the most conservative response from the U-M Energy Survey. While historical inflation rates suggests that a $100 monthly home energy bill would increase to $116, the smallest increase survey respondents said they expect to see is $125, a difference of nearly 8 percent.

But even their biggest predicted jump in prices wouldn’t make home energy unaffordable, respondents said. For that to happen, home energy bills would have to more than double, increasing by 130 percent, with a $100 monthly bill jumping to $230.

That percentage was much larger in the initial energy survey taken in October 2013, which found consumers saying prices would have to increase by 170 percent before their home energy bill would become unaffordable.

The change between the two surveys may be influenced more by the cost of energy at the time, researchers found. Between October and January, the average monthly bill reported by survey participants increased by about 22 percent, from $170 to $208. Some applied math indicates that the average where home energy becomes unaffordable was $408 in October and $428 in January, making the unaffordability level relatively consistent at an average of $420 for most households across the two surveys.

While weather and seasonal changes could explain some of the difference in responses from survey participants, the U-M researchers note that the unknown number of consumers participating in level-billing programs with their energy suppliers could mute some sensitivity to seasonal changes in home energy bills.

There were significant differences in the point where energy became unaffordable among different levels of household income, and between consumers who rent or own their own homes. The top third of incomes said their energy bills would have to increase to 2.7 times their current cost to be too expensive, while middle- and bottom-level households pegged their limits of affordability at a doubling in prices.

Between the October and January surveys, the mean increase in energy costs seen as unaffordable didn’t materially change in the bottom and top thirds of household income, but it did drop significantly in middle-income households, going from an increase of 160 percent to become unaffordable in the October survey, to about 98 percent based on the January poll. The response was similar when comparing participants based on their home ownership status, as well.

As for those consumers who already find their home energy bills to be unaffordable, researchers didn’t find any significant change between the two surveys, with about 5 percent of all respondents saying their bills were unaffordably high. In both surveys, that segment of respondents didn’t vary by region, income, home status or their self-reported knowledge of energy.