Monday, May 18, 2009

Pain at the pump: some gas math

Today, I filled up with gas only to find that gas prices had risen about 35 cents per gallon since the last time I filled the car up. Like most people, I was not very happy to discover this recent rise in gas prices. I felt the pain at the pump. On the other hand, I wondered how much I should really care that the price increased by 35 cents per gallon. Therefore, I decided to do some "gas math" to put this jump in prices into perspective.

Price per mile? Our car gets about 20 miles per gallon. Ignoring the costs of car maintenance, the 35-cent increase in gas prices increases the marginal cost of driving by 1.75 cents per mile driven.

For some perspective, consider the cost of a five-mile trip when walking versus driving. The walk would be nice for the first mile, but after a while, walking long distances becomes tiresome. At the current price of \$2.80 per gallon, the cost of a five-mile trip is \$0.70 in our 20 mpg car. That's a downright bargain, especially when the car gets you there faster.

Price per day? Now that we live in the city, we actually do less driving because (a) parking is so difficult, (b) other drivers are crazy, and (c) most things we need are within walking distance or accessible by public transport. We still drive more than the average city dweller. On an ordinary day, we drive five to ten miles. This implies that we usually go a whole month without filling up the tank. So, how much do we pay in gasoline cost per day?

Today's gas bill was \$38.08 for 13.606 gallons, but it was the first time this month that we filled the tank. For a 30-day month, that's \$1.26 of gasoline costs per day. That's about the daily cost of breakfast for my wife and me (two Costco muffins, plus ground coffee and orange juice). We spend more on lunch, and even more on dinner. Say we spend about \$30 dollars on food per day as a family. Rent is even more expensive at about \$50 per day.

Compared to our other major expenditures, gasoline totals to only 2.5 percent of our rent and 4 percent of our food costs. That's really not that much.

Why should we care? When it comes to the cost of transportation, most people drive more than we do. Still, multiply our figures by five, and it is not like we're talking about genuine pain. In this range of costs, we might be talking about forgoing a Starbucks latte per day or per trip. So, why do we see so many news stories describing our "addiction to oil" and the "pain at the pump"? At the end of the day, people make a choice to drive just like they make a choice to buy a Starbucks latte versus making their own coffee at home. That doesn't sound like something that should get policymakers too excited.

Maybe we should care about energy costs because of what they do to the price of other goods in our economy. The truck carrying the apples to your store needs gasoline to move the apples. A high price of gasoline raises the cost of bringing that apple to your neighborhood store. This logic applies to anything that needs transport, so it makes sense that you pay more for everything at the store when the price of gas goes up.

I don't think the news agencies have this indirect pain in mind when they run the stories about gas prices on the rise. The real pain from high gas prices is indirect: when gas prices rise, so does the cost of our enire bundle of goods. But, that's not exactly "pain at the pump."

1. It sounds like permission to me. It never fails that when the national news media interviews an "expert" that predicts that gas prices will rise, as if by magic, they go up 10 cents per gallon within a day or two.

The other amazing fact is that in rural America, all of the gas stations in a small city or town mystically have the same price for gas. When one raises its price, the rest of them are granted permission to raise theirs an equal amount. WHAT EVER HAPPENED TO GOOD OLD FASHIONED GAS WARS?

The old excuse for high gas prices was OPEC and their charging too much for crude oil. But crude prices have been very stable the past several months, and guess what, gas prices have risen about 90 cents per gallon. The other supposed reason is the old "supply and demand" argument. It is a proven fact that Americans are driving fewer miles (notice I didn't say less)and cars are becoming more economical, so how does that translate to increased demand? I guess that the oil companies could decrease supply by refining less gasoline and deisel fuel, or maybe that is exactly what is going on.

I think all we need is for the national news media to interview me, and I could be their new "expert" who would predict a dramatic drop in gas prices.

2. I will say, when you drive a 4x4 that gets 15 mpg (I have to because it was the only truck I could find in my price range and you need a 4x4 to get up my road) and you are driving about 30-40 miles per day, it is "pain at the pump"!

3. interesting point #2

I think tony wants people to do their own math. If you drive 30 to 45 miles per day at 15 miles per gallon, that's 2 to 3 gallons per day. At \$3 per gallon thats \$6 to \$9 per day...hmmmm... not quite tony's \$1.26, but he did tell you to multiply by 5.

\$6 to \$9 is eating lunch out versus making a sandwich at home. how painful is that?