Gas prices going up – how high is too high?

It is difficult to understand the economy; we are given dozens of measurements to help us – the Down Jones average, unemployment rate, job grow, housing sales, cars sales and customer confidence.   They are all important numbers, but they don’t help much, at least they don’t help me much.

The easiest way for me to measure the health of the economy is by checking my bank balance, reviewing my monthly bills and tallying my monthly income.  All things being given equal, the difference between the monthly expenses and income is my disposable income.  That disposable portion of our income is the money we all use to for a night out with dinner and a movie, a new larger, flat-screen television, a vacation to the Grand Canyon or a trip to a casino.   However, even without any inflation to worry about, there is one expense that is not so easy to plug into a budget – the cost gas.  Currently the average price of gasoline nationally is close to $3.76 a gallon; that is down from a year ago and according to NPR, it is said to be stabilizing and that is a good thing for all of us.

On March 25th, the Las Vegas Review-Journal had a story on the price of gas and its impact on the economy.  In the article, Howard Stutz quotes from Andrew Zarnett, an analyst with Deutsche Bank.  Zarnett says that for every one cent the price of gas goes up a billion dollars less is spent nationally on other things.  Zarnett said that when the price reaches $4.25 the economy starts to slow down and when it reaches $5 all hell breaks loose.  He was using the gross national product (GNP) when describing the impact of the price of energy on the economy; at the $5 level he said the GNP would suffer significantly.

Years ago, I discovered a similar concept, although I was unable to put it into a neat formula; I applied the concept to airline fares.  In the 1980s, many of Reno’s casino customers came from the Pacific Northwest; and they often flew rather than drive.  At the time, the price of a round-trip ticket between Reno and Seattle or Portland was $100 or $150 dollars.  We did not necessarily see an increase in visits from our Washington and Oregon customers if the prices of tickets went down.  However, we did see a decrease if the price went up – as little as a $10 increase in ticket prices had an effect.  It always surprised me that people who were willing to spend several thousand dollars on a weekend visit to a Reno casino were unwilling to come if the airline ticket cost $10 more than on their last trip.

Increases in energy prices drive up the price of airline tickets, but except for Las Vegas very few casino cities rely on air travel any longer.  Even Las Vegas gets over half of its customers via the highway and the automobile; in today’s casino market place, the local and the drive-up customers are the core of the business.  So, when gas prices go up it cost more to get to a casino, but more importantly the customers have less to spend when they get there.  Zarnett predicts the gas prices will continue to go up, but NPR in reporting on gas prices said prices had peaked and were declining.  The NPR version gives us hope for the coming summer and for the year in general – gasoline prices are predicted to be below that $5 danger point.

The Review-Journal article gives us a benchmark and something to watch; whenever that price of gasoline begins to creep over $4 dollars on its way to $5, the gaming industry and the rest of the economy is threatened.  So, if you want to keep up with the economy and create a better budget for yourself and your business add a gas price trend line to your database.

 The economic evaluation team at Deutsche Bank looked at how higher taxes and energy cost would negatively impact discretionary spending by consumers. The investment firm’s high-yield gaming analyst, Andrew Zarnett, said the report didn’t bode well for the casino industry. The economic report said that a one cent increase in gas prices reduces non-energy related consumption by $1 billion.  According to the report, when gasoline prices reach an average $4.25 a gallon, the nation’s gross domestic product growth begins to deteriorate. At $5 per gallon or above, gross domestic product growth stalls.  Zarnett said higher energy costs can hurt the gaming industry. Consumers would spend less on leisure activities, airlines would reduce capacity, and the costs to operate large casinos would increase. Howard Stutz, Las Vegas Review-Journal, 3-25-13

“As energy is a large cost in most services and products, inflation continues on an upward trend, again forcing the displacement of consumer disposable dollars from discretionary activities,” Zarnett said. Higher gasoline prices slows visitation to Las Vegas, Zarnett said. Automobile traffic accounts for 58 percent of the city’s total visitation. Automobile visitors spend less than visitors arriving by airline, Zarnett said. But the higher fuel prices, in the short term, could slow Las Vegas gaming revenue growth. “With fuel prices swiftly rising, we believe there is a possibility the number of repeat drive-in visitation may decline as they did in 2008 and for a brief period in 2011, when consumers reduced the frequency of car travel to Las Vegas,” Zarnett said. Howard Stutz, Las Vegas Review-Journal, 3-25-13



2 Responses to “Gas prices going up – how high is too high?”

  1. 1 rexdstock1 March 26, 2013 at 7:29 pm

    Is this some backdoor attempt to show support for the Keystone Pipeline?

    Not spend an extra ten on an airplane ticket so you can lose thousands.  That’s the way my wife looks at shopping:  she saves by spending!

    And, you’re right:  almost all of the metrics suck.  In fact, most of our metrics are stupid:  we equate wealth with achievement; we equate beauty with power and “ugliness” as a product of sin; we look at consumer confidence indexes–a process of 500 land line phone calls made a month–numbers that can affect billions of dollars in market cap. 

    I’m not sure win per day is valid!

    Nice piece, Kenny.

    >________________________________ > From: ADAMS – GAMING BUSINESS REVIEW >To: >Sent: Tuesday, March 26, 2013 2:36 PM >Subject: [New post] Gas prices going up – how high is too high? > > > >Ken Adams posted: “It is difficult to understand the economy; we are given dozens of measurements to help us – the Down Jones average, unemployment rate, job grow, housing sales, cars sales and customer confidence.   They are all important numbers, but they don’t help much,” >

  2. 2 ken adams March 27, 2013 at 1:12 pm

    As unpleasant as they are those metrics you dislike help, the help us contextualize what would otherwise be a very confusing world. We may rely on them too much and we may use the wrong ones – but we need them.

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