Show Me Institute : Lower Gas Prices Produces Higher Spendable Income for Missourians

I hope you enjoyed the extra (and unexpected) gift of lower gas prices this recent holiday season! According to GasBuddy.com, gas prices in Missouri averaged about $1.90 a gallon during the first week of 2015. This is significantly below the January 2014 average of about $3.00. How does this drop in gas prices translate into spendable income for the average Missouri household?

To answer that question we need to make some assumptions. First, we need an estimate for miles driven. Using national driving data for 2014 from the U.S. Department of Transportation the average male aged 35-54 drove 18,858 miles. The average female in the same age group put 11,464 miles on the car. Adding two teenagers to our household increases mileage driven by 8,206 for a boy and 6,873 for a girl. All told, then, our average family of four put about 45,400 miles on their car(s). If we further assume that the cars driven by our family averaged 25 miles per gallon, our representative family bought 1,816 gallons of gas.

Now for the income effect. At the January 2014 price of $3.00 a gallon, our family would spend about $5,450 a year on gasoline. At the current price of $1.90 (and assuming they do not increase miles driven) their gas bill drops a whopping 37 percent to $3,450. If the average family of four in Missouri had an income of about $72,600 in 2014, an estimate based on updating the 2013 median family income figures from the U.S. Census, their $2,000 savings in gasoline expenditures is equivalent to a 2.75 percent increase in household income. Not a bad raise for our average Missouri family!

What brought about this unexpected windfall? Increased oil production in the United States has been one of the most significant developments leading to more competition in world oil markets. With OPEC's control over oil prices curtailed, market forces have pushed oil prices and, therefore, gas prices down. Whether oil and gas prices remain at their current levels is unknown. What is clear, however, is that competition has once again benefited consumers.