This Just In: People Care About How Much Gasoline Costs

As reported in this NY Times piece, vehicle miles traveled (VMTs) in the U.S. dropped 4.3 percent from March 2007 to March 2008, the largest month-on-month decline since record keeping began in 1942. The rising cost of gasoline is changing people’s behavior. And we’re only at $4/gallon.

Among the impacts the authors list: “Big box retailers are suffering as customers balk at driving to the mall.” No quantification given, but one would assume that the authors probably aren’t just making stuff up. Meanwhile, some convincing back-of-the-envelope calcs done here and here suggest that higher fuel prices shouldn’t have much of an effect on the big box retail business model.

Other interesting factoids: the average cost in cents per mile traveled is currently 15; it hit a low point at 5.6 in 1998, and peaked at 17.1 in 1980 (note that the 1980 figure also reflects a lower fleet fuel economy). Were people reacting so strongly to high gas prices in 1980 as they are now? Perhaps we have more of “perfect storm” situation now, with our sagging economy, low consumer confidence, and reduced discretionary income for all but the top earners. But perhaps it also has something to with a change of national consciousness — people becoming more aware that there are alternatives to lives that revolve around driving.

ABSENT-MINDED UPDATE: Of course, the main reason gas prices are hitting harder now than they did in 1980 is because people drive a lot more. For example, this EIA report shows household VMTs increased 53 percent from 1.5 to 2.3 trillion miles between 1988 and 2001, while over the same time period the number of households rose by only 17 percent.

14 Responses to “This Just In: People Care About How Much Gasoline Costs”

  1. Queegmire

    In my experience, people don’t calculate their cost per trip, the most efficient route to the mall, or include mileage in their purchasing decisions. They will on the other hand change their behavior to avoid a singular unpleasant experience such as paying $60+ to fill up the tank.

    This means that more and more people are unwilling to just jump into their car for unnecessary trips (especially if the gas gauge is close to empty).

    If anything gas price related is hurting the “big box”/”drive to buy” stores its the fact that they will see less casual shoppers and as a result less impulse buying.

    For possibly the first time in this country the urge to avoid the gas pump is outweighing the urge to go look at shiny new things in big shiny stores.

  2. David Sucher

    Queegmire makes a good point. Personal decision-making is not always entirely rational and it’s conceivable that the impacts of this oil price increase — should it last and be permanent which I doubt — may be out of proportion to the real cost. And that may not be a bad thing.

    But I have my doubts that the oil prices we are seeing are permanent.

  3. Matt the Engineer

    [David] Why do you doubt this is permanent? I could imagine a dip down as speculators dry up, but long term how can prices do anything but go up? Do you not believe we’re past/at/near peak oil?

  4. dan bertolet

    Some good discussion of the “oil bubble” here:
    http://www.horsesass.org/?p=4920
    See in particular Roger Rabbit’s comments (who is that guy?).

    Also good relevant stuff here:
    http://seattlebubble.com/blog/2008/05/23/gas-prices-home-buying/

  5. Dan Staley

    An Oracle of Oil Predicts $200-a-Barrel Crude

    By LOUISE STORY
    Published: May 21, 2008

    Arjun N. Murti remembers the pain of the oil shocks of the 1970s. But he is bracing for something far worse now: He foresees a “super spike” — a price surge that will soon drive crude oil to $200 a barrel.

    [...]

    An analyst at Goldman Sachs, Mr. Murti has become the talk of the oil market by issuing one sensational forecast after another. A few years ago, rivals scoffed when he predicted oil would breach $100 a barrel. Few are laughing now. Oil shattered yet another record on Tuesday, touching $129.60 on the New York Mercantile Exchange. Gas at $4 a gallon is arriving just in time for those long summer drives.

    Mr. Murti, 39, argues that the world’s seemingly unquenchable thirst for oil means prices will keep rising from here and stay above $100 into 2011. Others disagree, arguing that prices could abruptly tumble if speculators in the market rush for the exits. But the grim calculus of Mr. Murti’s prediction, issued in March and reconfirmed two weeks ago, is enough to give anyone pause: in an America of $200 oil, gasoline could cost more than $6 a gallon.

  6. David Sucher

    I agree we probably won’t see $10/barrel oil.

    But consider this: oil has doubled in price in the past year. Has global demand (GNP is a good index, I think) doubled? No way. I don’t think we are seeing secular demand create $130/barrel but some sort of bubble & speculation — though do remember than bubbles & speculations are based on fundamentals-gone-bizerk and so there is indeed a general increase in demand for oil which means long-term higher prices.Of course we in the USA pay more because our dollar is weaker — but all bad things come to an end and eventually we will climb out of our hole and the dollar will strengthen, thus effectively lowering oil prices.

    So, no, I am betting that oil price has peaked for the time being and will head down to the $80 range, which is still a large increase over the $63/barrel it was last year this time. If I knew how to sell oil short, I would.

    That’s not necessarily good news, of course. Higher oil prices are good in that they promote conservation and search for alternatives Rational national policy would put a floor under oil prices. But good luck there.

  7. Matt the Engineer

    But what you haven’t discussed is supply. Even if demand had to double in order to double the price (which I strongly disagree with, as fuel is mostly inflexable in the short term and even a small bit of increased demand can have a large effect), that would only hold if supply stayed the same. But almost everyone agrees that after we reach peak oil (which we may have passed already), supplies will first fail to meet demand, then begin to rapidly decrease.

  8. David Sucher

    But Matt it seems to me that _absent speculation_ market price in response to increased demand and decreased supply should be proportional and predictable.

    Is it?

    And your statement that “small bit of increased demand can have a large effect” puzzles me. I know that is the sort of phrase going around; it sounds good but does it make sense? In fact we have a fair amount of very short-term flexibility in oil use. So I don’t see how that is so — unless you add in the fear factor, the unknown.

    I don’t know how to express it in economic terms but I just don’t get how “small bit of increased demand for oil can have a large effect on oil prices.” Why is there a multiplier? Yes it will have an effect but since there are so many many ways to decrease demand in the short run which effectively increases supply, I suspect that there is more to this current price increase.

    Now let’s get this in perspective. $63 barrel is by itself not cheap; and represents a social challenge. It was half that price in May 2004 — so there have already been big jumps.

    But oil price doubling in one year? I don’t get it. I think the market is overshooting, just as it did with housing and just as almost all markets do.

  9. Dan Staley

    One only need to watch jittery markets after Nigerian work stoppages, Iraqi pipeline sabotages, Russian threats to Eastern Bloc countries, etc to see that liquidity is low, and supply is very close to demand, if not balanced on a knife edge.

    Speculative bubbles? This is the subject of much discussion, but bubbles these days generally are not global, and these folk I respect have interesting takes (mouseover): here, here, here, here, and few folks talk about the market not working as Adam Smith wished for this case.

  10. Dan Staley

    MATT:

    I found the VMT data you were asking about at Sightline. I think you’ll find what you want in that .xls.

    —–

    Marketplace this morning had a little piece about oil prices and why, here.

  11. Matt the Engineer

    [David] The effect comes from how inflexible the demand for a resource is. Let’s take the extreme example to illustrate the point.

    A small martian town with 1000 people has a few oxygen dealers, and everyone needs to buy a tank of oxygen a day. The cost of each oxygen bottle is $1, and there is normally a high amount of supply, so the dealers sell oxygen for $1.10 to make a nice profit for themselves. One day the dealers run low on supply and only have 999 bottles. How much will each bottle cost? It won’t be slightly over $1.10. It will be a little more than the poorest person in the town can come up with. This is an example of an extremely inflexible resource.

    Of course oil isn’t nearly this inflexible. There are a few people who will stop driving when the price gets high enough. But most people will resist this until the price is very high. And most trucking companies, shipping companies, ferries, cruise ships, trains, etc. will pay very high prices before they cancel a run. Also, our world is growing and new drivers, trains, ships, and trucks are being constantly added to China and India. I’m sure they’ll junk them all once the price gets high enough, but the price has to get pretty high before you put your new car on blocks and stop driving all together.

    My point? Doubling the price doesn’t mean you’ve cut the supply in half. Also, a small bit of increased demand can have a large effect. It looks like we’re mostly disagreeing about whether the demand for oil is flexible or not.

    (plus click on Dan’s links – good stuff)

  12. David Sucher

    Matt.
    The punch-line of this post is “The rising cost of gasoline is changing people’s behavior.”

    How far that will go, no one can be sure. We are clearly in uncharted territory. But people used to say that electricty demand was inflexible and they were dead wrong.

    My own hunch is that we will see fairly massive shifts to smaller cars etc which will create a lot of room for change. The only threat is that oil prices may come down significantly; that’s why I was suggesting a govt-imposed floor price as a matter of national security.

    As to your economic analysis, I am not enough of an economist to be able to comment usefully.

  13. Alexwebmaster

    Hello webmaster
    I would like to share with you a link to your site
    write me here preonrelt@mail.ru

  14. shafted screw conveyor

    shafted screw conveyor…

    [...]This Just In: People Care About How Much Gasoline Costs | hugeasscity[...]…

Leave a Reply