Impact of Gasoline Spending on US Household Budgets

By Holly Maher

Having worked in an oil refinery for the majority of my career, the question “why is gasoline so expensive?” has been posed to me on more than a few occasions.  It is normally asked with a great deal of frustration and sometimes with a bit of anger directed at the oil companies (and those who work for them).  So, with summer driving season officially kicked off, it seems like an appropriate time to tackle this issue.

If we ask the question “What is the problem” we can expect to get different answers:  crude oil price is too high, oil companies are making too much profit, people are driving too many SUVs, etc..  All of these answers give perspectives on what different people view as the problem, which is subjective.  So in order to start the analysis, we have to identify how this issue is impacting our goals.  In terms of the impact to the average American family, the annual spending on gasoline is impacting the household budget.  In 2011, the average spending on gasoline was $2,655 or roughly 4% of the average household gross income.

Once we have identified the impact to the goal we can begin the analysis.  We start by asking “why” questions and documenting the answers to visually lay out all the causes that contributed to this impact.  The cause-and-effect relationships lay out from left to right.  The average annual spending on gasoline is caused by both the price of a gallon of gasoline, which in 2011 was $3.52/gal, as well as the annual consumption of gasoline (average household consumption was 754 gallons in 2011).  Although the national discussion tends to focus on the price at the pump, the price alone does not create the impact to the household budget (you don’t see too many articles on the price of a gallon of milk, which, by the way, in 2011 was $3.57/gallon).

The price of a gallon of gasoline is set by 4 primary causes:  crude oil price (~68% of the price), state/local/federal taxes (~13% of the price), transportation and marketing (~11% of the price) and the cost of refining the crude oil into useable products (~8% of the price). The price of crude oil in 2011 was $94.87/bbl (barrel).  This is compared to $27.39/bbl in 2000 and $23.19/bbl in 1990.  This price is set by normal supply and demand economics, both internationally and domestically.  The global demand for crude oil has dramatically shifted in recent years as the countries in eastern Asia have moved into their “industrial revolution”.  The supply of crude oil globally is set not only by total oil well capacity, but also by transportation availability, OPEC targets, as well as political sanctions on oil-producing countries.

In addition to normal supply and demand economics, crude oil is a traded commodity on the stock market and is susceptible to price fluctuation based on fear and speculation.  Prior to 2000, the energy market and trading of energy futures was regulated because of the significant impact it could have on the economy.  In 2000, the energy sector was deregulated as part of the Commodity Futures Modernization Act of 2000.

The average annual household consumption of gasoline in 2011 was 754 gallons.  This is caused by the annual miles driven per car (15,000 miles), the number of cars per household (1.95 cars), and the fuel efficiency of the cars.  The average mileage per car is caused by commute mileage, whether household members carpool, whether household members utilize public transportation and recreational miles driven (outside of work).  The fuel efficiency of cars is determined by the types of cars driven, the fuel efficiency technology available and the vehicle fuel efficiency standards required by law.  In 2011, 50% of the household vehicles purchased were classified as light trucks.  New fuel efficiency standards were introduced for vehicles in 2011 requiring passenger cars to meet 30.2 miles per gallon (mpg) and light-trucks to meet 24.2 mpg.  This was an increase of 2 mpg for each type of vehicle.

Once the analysis has been broken down into its causes, solutions can be identified to mitigate the impact to the goal.  Even with this initial, basic analysis, solutions start to be become visible. Household members could car pool more (with friends, co-workers, or their spouse).  Household members could take public transportation, if available, and communities could work to make public transportation more available to residents.  Households could purchase more fuel efficient vehicles. The government could continue to increase fuel efficiency requirements.  The government could pass a law re-regulating the energy sector.

As with any incident or problem with significant impact to the goal(s), the analysis always reveals more than one single cause.  Being able to see multiple causes gives us the opportunity to find more than one potential solution.

To view the Outline, Cause Map, and solutions please click “Download PDF” above.