Fuel prices - the secondary market for most consumers second-most valuable property

A condensed version of this analysis was originally done for Gerson Lehrman News and posted 12/11/08
Original Article: Advertising Age http://adage.com/article?article_id=133072

Implications:
1) After a home, the auto is the second most expensive item most people own.
2) The up and down volatility in fuel prices is lowering demand, regardless of price
3) Fuel prices do impact mid and lower-mid income earners most dramatically

Analysis:
On October 20th the EIA (Energy Information Agency) listed the average retail price for regular unleaded at $2.914/gallon, and it had been on a downward trend for 6 weeks or so at the time.

In it's report released on December 8th, the average price was $1.699/gal. In 49 reporting days, (7 weeks) the price went down $1.215/Gal, or 41.6%, and it wasn't even a primary economic headline.

The CSP Daily News is reporting as of December 9th that the savings at the pump aren't translating to dramatically increased inside sales at the convenience store portions of the fuel outlets. What is going on with the consumer?

Wal-Mart (NYS:WMT) may very well be getting those savings as increased holiday sales. In late summer, when $4.00/gal fuel was being sold, the discussion being had about people needing to trade down from SUV's and minivans to hybrids and smaller vehicles was a laughable argument. Most families purchase their vehicles with consumer credit, and if you were 2 years into a 5 year loan on a SUV or pickup truck, you couldn't just adjust what vehicle you chose to drive on a daily basis.

The secondary market of vehicle costs, fuel prices, is much more volatile than the vehicle market itself. That’s why demand didn’t decrease more than it did; people were forced to drive what they owned, regardless of the cost to operate it. And having seen the automaker bailout play out over the last two weeks, there wasn’t enough alternative and hybrid production to accommodate that vehicle demand, in any case.

Fuel demand is going to adjust lower, as people have been shocked into realizing how vulnerable to energy costs their personal finances and their lifestyle actually are.

Credit was already tightening up, and the average mid-level consumer felt we were in a serious economic slowdown, even if they weren't saying it. You just bit the bullet, filled the tank to keep your transportation means on the road, and hoped prices would eventually come down. Well, now they have.

Fuel prices do impact the mid-level and lower earner most dramatically, and they are using the “savings” to 1) try and recoup some of the budget damage done to them this summer, and 2) get through the holidays without accruing too much additional debt.

The average consumer is worried about the direction of the economy as a whole. "Flash for Cash" is so last year! Wal-Mart shopping was never a stigma for the average consumer, and people "trading down" are learning what lots and lots of people have known for years. Value never goes out of style.