The Repercussions of $4 Gas

Now that oil prices have crested another heady threshold—settling above $100 per barrel, for the time being—it's time for motorists to start contemplating another once-implausible scenario: pump prices of $4 per gallon.

Just a few years ago, auto-industry futurists thought that $3 gas would be a game-changer, unnerving consumers and forcing dramatic changes in their choice of cars and driving behavior. Since then, gas prices have spiked above $3 several times, but they've usually drifted back down. Until now. Since last summer, gas prices have steadily ticked upward, to about $3.20. And with the spring and summer driving seasons approaching, many analysts think increased demand and other factors could drive pump prices higher still. "Four-dollar gas is possible, maybe even probable," says Bill Reinert, national manager for advanced technology at Toyota. "We could even see $5 gas."

If gas does hit $4, here's what's likely to happen:

At first, not much. One of the surprises of $3 gas has been the blasé consumer response. Drivers have made some adjustments, such as buying cars with smaller engines, driving a tad less, and downsizing their wheels a bit. But they haven't fled big vehicles for economizers in nearly the numbers analysts once expected, or changed their driving habits that much.

One big reason is that rising incomes have helped offset higher gas prices. Americans today spend about 4 percent of their household income fueling their cars, which is up from the glory days of the late '90s, when gas was as cheap as a buck a gallon. But it's still much lower than the early '80s, when spending on gas peaked at about 6 percent of household income. "If $4 gas is only short term," predicts Bob Schnorbus, chief economist at J. D. Power & Associates, "people will do what they've been doing the last five years: complain but keep on buying."

Drivers will drive differently. There's a bit of evidence that people are beginning to drive less, to save money. But in households with more than one car, it's much clearer that drivers are opting for the most efficient car over the family SUV for errands and short trips. While the typical family fleet hasn't changed that much, data from CNW Research show that overall gas mileage in households with two or three cars has risen about 12 percent since 2000. "People are using the cars they own more efficiently," says Art Spinella of CNW. "People are very, very capable of absorbing $3 gas into the family budget. If it's a spike, they can do it at $4. But if it lasts for six months or more, it will be very difficult to absorb into household income."

Consumers will spend less on other stuff. If $4 gas persists, the extra money will have to come from somewhere. My colleague Marianne Lavelle has calculated that if gas rises to $4 per gallon over the next two months, and stays there, the average U.S. family will pay nearly $400 more for gas in 2008 than in 2007. In many cases, the extra gas expenses will outstrip the free money consumers will get through the stimulus checks the government will send out this spring.

For most drivers, it's easier to cut back on other goods than on gas, which they need to get to work and school and ferry their kids around. A recent survey by Kelley Blue Book found that of people shopping for a new car, 44 percent said they're eating out less to offset the additional money they're spending on gas. Forty percent said they're cutting back on entertainment spending, and 9 percent said they're even delaying the purchase of a new home. The overall economic downturn is probably a factor in those decisions, too. Yet rising energy costs are contributing to the slowdown in the first place, effectively nipping at consumers twice.

Shoppers will shift to more efficient cars...eventually. Hybrids and other gas sippers are catching on gradually, but drivers remain reluctant to give up space, performance, and styling, or pay the premium that usually comes with a hybrid. Surveys do suggest that $4 gas could be a new threshold at which people will be willing to downsize or pay extra for a hybrid. But the financial crunch from costlier gas, combined with the current economic slowdown, could also lead some car owners to hold on to their cars longer. Even if gas hits $5, change could be slow—except for the politicians who'd end up taking the blame. "At $5," says Spinella, "every incumbent gets thrown out of office."