Why $4 Gas Makes Consumers Freak Out

It wrecks our sense of freedom and makes us feel trapped.

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Does anything test our sanity like the price of gasoline?

With gas prices up about 80 cents so far this year—and hitting $4 per gallon in about a dozen states—drivers are showing the usual signs of mania. Some are rushing to dealerships to trade in their current ride for a hybrid or other kind of fuel-sipper, even though surging demand has pushed the price of high-mileage cars up by more than 10 percent this year. There are more reports than usual of gas theft—a.k.a. siphoning—and drivers running out of gas because they wait too long to fill up, hoping to coax a few extra miles out of the fumes left in their tanks. Then there are the drivers who go far out of their way—burning fuel the whole time—to buy gas that's a few cents cheaper than they can get closer to home.

[See 10 reasons you don't need a hybrid.]

Rising gas prices are a genuine burden on millions of motorists, forcing them to pay more out of pocket while getting nothing extra in return. If average gas prices go much above $4 and stay there for six months or longer, it could even trigger a broad slowdown in consumer spending and perhaps another recession.

But the price of gas also has an outsized effect on consumer psyches, causing more gloom than usually warranted. Motor fuel accounts for 5.4 percent of the typical household's spending, which is significant, but it's far less than we spend on food, rent, or mortgage payments. It's also less than we spend on healthcare, entertainment, or cars themselves, and for families with kids in college, it's less than they spend on education. Yet a spike in gas prices can ruin our day much faster than a hike in rent or insurance premiums or even food prices, which we're more likely to forget about once we've absorbed the hit. Here are four reasons why gas prices have such a powerful effect on consumer attitudes:

We're captive to gas. There are ways to adjust when the price of certain items goes up. We can buy more store brands to help offset rising food prices. We can cut out other things altogether, like junk food, booze, and impulse purchases. Some people even skip doctor's visits to cut down on healthcare costs. But for most people, there's no easy way to compensate when gas gets more expensive. For most drivers, biking to work isn't a realistic option. Families with kids to haul around can't just switch to public transportation. And downsizing to a more efficient car isn't always as rational as it seems. A decent car costs $20,000, once taxes and fees are added in, a hefty purchase requiring at least a few thousand dollars for a down payment. Some drivers even make the mistake of paying more for a new lease or car loan than they save through higher mileage.

[See why car buyers should wait 6 months to buy.]

So we feel trapped. "Americans are very dependent on their automobiles," wrote economists Chris Christopher and Gregory Daco of forecasting firm IHS Global Insight in a recent paper. "When gasoline prices increase, households have little choice but to pay the additional charge." For families on the edge, the money often comes from savings or credit-card loans. It feels like a forced sacrifice we're powerless to do anything about. And if driving represents freedom, it's a privilege that gets more and more expensive and doesn't feel free at all anymore.

Gas prices are highly visible. Prices for milk, bread, shoes, movies, and even medical services are advertised in small numbers that usually disappear once you leave the store or file the receipt. Gas prices are advertised in foot-high numbers on every street corner, bombarding our consciousness even when we're not shopping for gas. The media compounds the visibility with endless features describing the pain, usually with visuals highlighting the highest gas prices in the nation. (Sorry.) Social scientist Dan Ariely of Duke University has also pointed out that when we pump our own gas, we usually stand at the pump staring at the price, growing more and more irate as the tally hits $50, then $60, then $70. It's nearly impossible to escape the national pity party over $4 gas, and we add to our own irritation instead of simply acquiescing.

[See why $4 gas need not wreck your budget.]

We have false benchmarks. We tend to think that the "right" or appropriate price for gas is the lowest price we can remember—not an average of all prices we've ever paid, and certainly not the highest price we've ever paid. We also tend to make big decisions, like what kind of car to buy, based on those false benchmarks. When gas hit $4 per gallon in the summer of 2008, for example, sales shifted abruptly from big SUVs to smaller crossovers and economy cars. But when gas fell back below $2, buyers migrated back to bigger cars, as if $4 was an anomaly and $2 was the "normal" price for gas.

At some point—quite possibly now—it could end up reversed, with $4 the norm and $2 gas a thing of the past. But those past prices have an unusually powerful influence over our thinking. As Ariely says, hardly anybody remembers what the price of milk, bread, or yogurt was a few years ago. But we practically carry a chart of gas prices in our heads.

[See who inflation hurts the most.]

Round figures trigger a ruinous sensation. The IHS research shows that when gas prices rise by small increments, it usually affects consumer confidence by the same incremental amount. The exception is when prices cross a threshold level like $3 or $4 or, theoretically, $5, which generates a disproportionate drop in confidence. "When prices go from $2.99 to $3.01, people get very fed up and feel in a worse mood," says Christopher. When gas prices fall, by contrast, the impact is more muted, and it takes us longer to feel good about cheaper gas than it does to feel bad about costlier gas. So as more Americans start to see the dreaded $4 figure on the pumps at their local station, the national funk will deepen. Better put a lock on your gas tank.

Twitter: @rickjnewman