What Happens When Gas Hits $5? $7? $10?

Updated to correct a reference to additional taxes levied by states on regular gasoline.

BOSTON ( TheStreet) -- If you were around in the 1970s, you'll undoubtedly cringe to recall leisure suits and disco dancing. Even more unsettling: the memories of trying to pump gas.

Twice during a decade marked by double-digit inflation -- in 1973 and 1979 -- oil shortages caused by an OPEC embargo and political unrest in Iran, respectively, made it costly and aggravating to fill your tank.

In 1979, short supplies of gas meant rationing and lines of cars stretching far down the streets.

In 1979, gas sold for roughly 90 cents a gallon, a little more than $2.60 in today's dollars and much less than the $4.14 high seen in 2008. But short supplies meant, in many states, that you could gas up only on designated days of the week. Lines were huge, stretching far down the streets of service stations. Sales of lockable gas caps soared as a preventative to roving thugs who would brazenly siphon out your hard-fought fuel while you slept.

Today, with gas above the $4 mark at many Exxon-Mobil ( XOM), BP ( BP) and Chevron ( CVX) stations across the nation, things haven't gotten quite that bad. There is, to be sure, pain at the pump. But gas supplies remain healthy and free -- despite political unrest in many oil-producing nations. People grumble and count their pennies, but they seem to have adjusted. In fact, gas prices appear poised to even drop a bit in coming days.

But when will they get pushed over the edge? Is $7 a gallon enough to cause personal pain? Is $10 unthinkable or a worrisome milestone that will eventually get here, as it did in Europe?

How high, or low, gas prices will go is really anyone's guess. What you pay at the service station now has as much to do with commodity speculation, the value of the U.S. dollar and taxes as it does with the actual supply chain.

The government could, for example, levy greater taxes to raise revenue and, in theory, reduce consumption.

The federal excise tax on gasoline is 18.4 cents per gallon for regular, and states and local municipalities add their own increases. For example, the total tax hit averages 66.1 cents in California, 63.6 cents in Connecticut, 64.2 cents in Hawaii, and 52.8 cents in Florida.

The Obama administration tried to distance itself quickly from a plan to tax motorists by tracking each mile they drive, which was contained in a leaked draft of the Transportation Opportunities Act. A similar proposal for a mileage tax was floated by the nonpartisan Congressional Budget Office as one method to fund plans to spend $556 billion over six years on transportation projects.

Here's what happens when a gallon of gas hits $5, $7 and $10:

Five dollars
The majority of Americans say high gas prices have had a significant impact on their daily lives and that they are driving less than they were a year ago, according to a Rasmussen poll released this week.

The survey found that 43% of American adults say the rising cost of gasoline has had a "big impact on their personal lifestyle." The good news: that finding is down eight points from April 2008, the last time gas prices peaked.

Forty-one percent (41%) of adults say they are not driving as much as they did a year ago and 72% of Adults say it's at least somewhat likely that the price of gas will rise above $5 a gallon by July 1.

If, or when, gas hits $5 a gallon, the transition from an annoyed public to a scared one could be under way.

"Even in the $4 range right now, we've been there before, so people may not be comfortable with it, but they have paid it before," says Mike Wall, founder of Wall Financial Group, a wealth management firm in Central Pennsylvania. "They went through that process and said, 'It is what it is.' People are going to be mad, they are going to be frustrated, but overall they are still going to live their lives. I think when we get to the point to where it gets into the high $5 range, moving towards $6, at that point people are going to say, 'Where is the end ... What's going to happen next?'"

Consumers who choose hybrids and electric cars for environmental reasons remain a select group, he says. As gas hits $5 a gallon, even SUV diehards will start to think smaller and more efficient. More will take public transportation or ride bicycles to work.

At $5 a gallon, there may start to be an impact on savings habits, particularly among younger people who may push off planning for retirement.

"The younger generation, in general, is a 'show' generation," Wall says. "They have to have the iPhone, the latest iPad, the new this and the new that. I think the last thing that will change is that lifestyle. What will change is they will say that 3% into their 401(k) is just 'something they are not going to do right now. I'll stop it now, but I'll start again when prices go down again.'"

Getting back on track with their savings, unfortunately, may prove to be lip service, Wall says, and could lead to "hesitation" by other investors and a pullback from the market.

"If we have some pullback from investing in 401(k)s or the like I think we will see a little bit of hesitation in the market," Wall says. "The market itself is still driven by institutional money management, but with TD Ameritrade ( AMTD), E*Trade ( ETFC) and Scottrade we are seeing more and more from the individual investor. I think as people start to be concerned by some of these oil issues, they are going to start to say, 'I need to be a little more conservative now and save my money.' So maybe they put more money in cash and pull some money out of the markets."

As was seen during the gas price spike of 2008, to date the highest the cost per gallon has ever gone, the crunch on disposable income led in part to more Americans using credit cards to buy everyday items. With a national savings rate that has crawled from near zero up to about 4%, a setback in paying down and better managing debt could set the stage for future financial woes.

Also on the chopping block would be dining out. Not only would consumers have less to spend on a too-tired-to-cook night out at Chili's or Applebees, but rising food costs would curb these budgets all the more. Grocery shopping would also need to be a more bargain-focused task as transportation costs push up the price of fresh produce and prepackaged goods alike. Expect to pay at least an extra 10% to 15% for many products once transportation costs rise in sync with gas.

Seven dollars
At $7 a gallon, American life could very well start to change. Though we still wouldn't be paying as much as most Europeans, our nation's dependency on cars and trucks would put us in a precarious position.

At this price point, hybrid cars would no longer just be environmentally friendly; they would be cost-effective -- meaning gas prices would have to top $7 per gallon for the gas savings of most hybrids to overcome the price premium paid for these vehicles at the dealer.

A recent study by CarGurus, an online automotive community, analyzed 43 hybrid cars that have similar, nonhybrid, gas-powered models, and found that on average the hybrid models cost 17% more to own and operate. Among the hybrids looked at, the average MSRP difference was $6,400.

Enjoy pizza delivery, sending flowers, door-to-door groceries and cheap online shipping? Be prepared to pay an exponentially higher premium -- and that's only if merchants and companies still find those delivery services viable at a hefty price point.

Renting a car? Make sure to fill up before returning it. Already, many rental companies are charging $10 or more per gallon when you leave it to them to top off the tank.

Shipping a package? Companies such as FedEx ( FDX) and UPS ( UPS) factor in a fuel surcharge for ground shipping. Already at 8.5%, these extra fees could nearly double once fuel rises to this price per gallon.

Jamie Cox, managing partner at Harris Financial Group in Colonial Heights, Va., doesn't see gas prices sneaking above $6 a gallon any time soon as, at that cost, demand will likely drop.

That's the good news. The bad news is that if it prices do soar past $6, it will be due to either a temporary or long-term supply constraint.

"The elasticity of demand seems to be pegged at about $4," Cox says. "You are already starting to see changes in behavior in terms of auto sales. Look at GM's earnings last week. The cars that are being bought are crossover and smaller. They are really not selling too many trucks, it's more cars now, which is unusual. The demand destruction is probably between $4 and $6, and it might not even trip $6 unless there is some kind of supply shock."

If there is a supply shock, it would "probably crash the emerging markets," he adds. "The inflation part of it would really cripple most of the emerging world."

In the U.S., the real estate market could be thrown into a state of flux as people move closer to where they work.

"We've already seen urban migration, and I think you'll see even more of it, where you can no longer live on a farm somewhere out in Indiana because the cost to move things around is just so high that it just doesn't make sense," Cox adds. "People will live closer and closer to city centers. If you live more than 20 miles away, you are spending close to as much on gas as you make in a week's time working for minimum wage after tax -- and that's with gas prices at $4 a gallon. If you max that up beyond $6, you'll be spending more to get to work than you are for the car. You get to the break-even point where collecting unemployment is better."

Consumer sentiment would likely start to dip and, as a result, discretionary spending would be reined in, a huge drag on the economy in general.

Cox says that rocketing gas prices would disproportionally affect the lower and upper age ranges.

"If you are on a fixed income, over 60, and oil prices go up, it will crush you faster," he says. "If you are under 25, just getting out of college trying to find a job, you are going to get squashed. It is in the middle of the curve where you've got some safety, but you had best have a very stable job. It would cycle us back to where we were in 2008, where the price of moving things around is going to reach a breaking point. It could very well lead to another financial crisis."

Ten dollars
Chaos.

Think back to the Mad Max films of the 1980s. Mel Gibson speeding through post-apocalypse Australia in one of the world's last V-8s, fighting off marauding hordes hell-bent on hijacking oil tankers. Everything you ever knew and loved? Up in smoke, just like most of the world's precious fuel supply.

OK, that's probably not going to happen. But the toll of $10-per-gallon gas is certainly a scary thought.

At this price, increases would be very much driven by supply constraints, rather than just speculators or boosted taxes.

The Federal Reserve has estimated that every $20 jump in the cost of a barrel of oil can add at least two-tenths of a percent to the unemployment rate. That impact could be even greater; truck drivers, carmakers, farmers and construction workers would be just some of the workers in severe danger of being downsized.

A recent analysis by Deutsche Bank estimated that every penny increase in average gas prices squeezes $1.4 billion from the U.S. economy. If those calculations hold true, expect the national coffers to be drained by $840 billion beyond the current impact at $4 a gallon.

An argument, and perhaps cause for some optimism we can survive this cringe-worthy scenario, is that many other countries are close to that mark and still manage to maintain "business as usual." Associates for International Research recently compiled what cities throughout the world pay for a gallon of gas. Among the most expensive -- seen in U.S. dollars, as of March -- were: Istanbul, Turkey ($9.63); Oslo, Norway ($9.27); Athens, Greece ($8.50) and the United Kingdom ($8.17). On the flip side, residents of Caracas, Venezuela, pay only 0.06 cents per gallon, and it's 45 cents in Riyadh, Saudi Arabia.

"If you look at other countries, the European Union, they have gas prices of $7, $8, $9 dollars, so why couldn't we have the same thing here?," asks Casey Weade, vice president of Howard Bailey Financial in Fort Wayne, Ind. "The reason they can afford to have those $8 to $9 gas prices is because they have the infrastructure for it. People are taking the bus over there, they are taking public transportation. It has been built into their system. Over here, we don't have that."

Because he doubts gas would reach the $10 mark quickly, the run-up would give the U.S. ample time to improve infrastructure and consumers a chance to modify their behavior.

"We are going to have a struggle with gas prices going up, and it is going to severely hurt our economy if we don't have the infrastructure to get people to work and to the store," he says. "They are already building those things in the major cities. Now we need to bring it out beyond them into more rural areas as well."

--Written by Joe Mont in Boston.

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