Will oil spoil spending? Not among affluent

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Wal-Mart customers are reining in their spending, apparently feeling the pain of rising oil prices. Yet consumer confidence remains robust, Hummer is having a hummer of a summer and most Americans are showing no sign of throttling back on their gas spending.

Given such a paradoxical picture, marketers could be forgiven for feeling a little confused about the prospects for consumer spending. The truth may be that it depends which consumers they are selling to, since rising oil prices have a disproportionately damaging effect on lower-income Americans.

That was reflected last week when Wal-Mart unsettled the market by reporting disappointing second-quarter results and a weak third-quarter forecast and blamed them on surging fuel prices. "We believe that high gas prices will continue to impact a large portion of our customer base," said Chief Financial Officer Thomas M. Schoewe.


The reality is that income gains have made $3 gas affordable for most households, and, in fact, as a proportion of their income, the average U.S. household is spending little more on gas today than it was 20 years ago. In 1984, at $1.21 a gallon, the average U.S. household spent 4.5% of pretax income on gas and motor oil, according to Energy Department and Bureau of Labor Statistics data. By 2003, this fell to 2.6%. This year, based on estimated '05 income, no change in behavior, and an average gas price of $3, they'll spend about 4.6% of their income filling their tanks-about even with '84.

But the picture changes for lower income families. In 2003 households with the lowest 20% of income spent 7.5% of their money on gas. This year, they will pump some 11% of their paychecks for $2.50 gas; $3 would take 13.6%. That curtails buying power of Wal-Mart's poorest consumers.

The effect of gas prices on the family budget is directly tied to income. Marketers selling to low-income households face obstacles. Affluent households own more vehicles and spend more money-albeit a lower percentage of their income-on gas (see chart). Lexus will be just fine; its new hybrid SUV may be quite the status symbol.

Still, even the wealthier consumers may make changes in their purchasing habits if prices remain high for some time. They have plenty of options to counter high prices-hybrid vehicles, telecommuting, online shopping and banking, video on demand-and history certainly suggests surging prices change behavior.

In 1974's energy crisis, during which the Ad Council and others campaigned to persuade the public to conserve gas, miles driven per car fell to its lowest point since 1951. Driving also fell in 1979 and '80 as pump prices broke a buck. But Americans soon hit the road again. The average car was driven a record 12,242 miles in 2003, according to the Energy Department. Average new car/light-truck miles per gallon jumped from 13.1 in '75 to 21.1 in '82-and hasn't budged, says the Environmental Protection Agency.

PSA potential

Adjusted for inflation, gas prices today are below the March 1981 record of $3.03. But this isn't 1980-1981-double-dip recessions and runaway inflation. Nor is it 1974-gas lines, recession and near historic low consumer confidence.

Still, sustained high fuel prices would hurt the travel industry, making car vacations less appealing and wreaking havoc on weak airlines.

As in '74, however, there's the potential for public-service advertising to promote conservation. But there is no gas shortage this time; consumer motivation is to save money, not the environment. Big Oil might spend to spin its story: BP, ChevronTexaco, Exxon Mobil and Shell boosted U.S. measured-media spending 17% to $219 million, according to TNS Media Intelligence.

But Americans now are optimistic. University of Michigan surveys over the past two months recorded the highest overall level of consumer confidence since the last downturn began nearly five years ago, according to survey director Richard Curtin. Gas prices diminished confidence, he said, but other factors offset that.

Real-estate euphoria trumps gas-price angst. Two-thirds of households own a home; others clamor to join the block party. Mr. Curtin said home-buying plans gained strength last month from expectations of even more home price hikes ahead. Such is life in the bubble.

The oil industry has consumers over a barrel, but that's a price drivers are willing to pay to gas up their new toys. Driven by Detroit's deep discounts, automakers sold a record number of vehicles last month-more trucks (59% of sales) than cars.

High gas prices certainly raise the appeal of thrifty makes. As in the mid-`70s, Asian brands lead the way: Toyota can't make enough Prius hybrids; Honda and Nissan are readying mini-car rivals to Toyota's youthful Scion. But gas is plentiful, and consumers aren't so willing to give up their SUVs. General Motors Corp.'s year-to-date sales of Hummer are up 62%.

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