Gasoline Drives Toward $3 as Economy Improves
I’ve noticed a lot more traffic on the road just in the last few weeks.
While $3-a-gallon gasoline can be seen as a symbol of economic gains, it’s expected to spark some consumer protests and flashbacks of the overheated markets that led to $4 gasoline. Retail gasoline prices hit their all-time record high of $4.11 in July 2008, a time when Americans were consuming 9.3 million barrels a day. To compare, official estimates put last week’s demand at 8.9 million barrels a day.
People respond emotionally to rising gasoline prices and typically “will drive a mile out of the way for every half a cent a gallon,” said Neal Walters, partner in the energy practice at A.T. Kearney, a global management consultant firm.
People respond emotionally to rising gasoline prices and typically “will drive a mile out of the way for every half a cent a gallon,”
The cure for that is $6/gal gasoline.
People who “will drive a mile out of the way for every half a cent a gallon” are not acting in their own best interest. At 22 mpg, one mile takes 4.5% of a gallon, which at $2.50 per gallon costs 11 cents. You’d need to buy more than 22 gallons to save the half-cent per gallon savings.
At $4.00 per gallon it costs 18 cents in gas to drive the extra mile.
And since auto operation costs much more than just gasoline (at least 50 cents per mile), the numbers are really even worse.
Ah, but “The Market is rational…”
A mile for a half cent? Where’d he get that number from? On my typical fillup, that might save me six cents on a $36 purchase.
The real question is when people start driving *less* and using bikes and/or transit more. Last time around, $4 seemed to do it.
Well, he did say “people respond emotionally;” not rationally.
Nobody knows what the “elasticity curve” looks like for gas prices as they go above $4.00. $3.00 didn’t do much for behavioral change. $4.00 appeared to make some real impact. It remains to be seen what $5.00, $6.00, etc. will do.
It’s funny, I had this argument with an economics professor over a decade ago. She (and the textbook) insisted that gasoline was highly elastic and as the price rose consumption would fall proportionately.
I instead posited that just because gas prices go up doesn’t make my school or work get any closer. Yes, people will take fewer leisure trips, but that does not constitute the bulk of gasoline purchases. Not to mention that truckers don’t make shorter trips just because the cost rose. I think my position has been supported over the past 10 or 12 years.
It will be interesting to see what happens when prices break $4, then $5, and on… I don’t expect we’ll see any dramatic drop in gas consumption in the short term. Were those prices to persist for a year or more, then I think we’ll begin to see it taper off. But I’m not holding my breath.
Please look at the second article I posted here as a comment. It says that the supply prices are being manipulated because there are very few refinery owners. There used to be hundreds of refinery owners, but now, there are very few.
Mighk wrote:
“Nobody knows what the “elasticity curve” looks like for gas prices as they go above $4.00.”
Kevin’s comment:
I do. Current gas prices in Toronto are almost $5.00 per US gallon. In the summer of 2008 they hit $7.00 in Toronto and over $10.00 in the UK.
Result: A few people switched to cycling and public transit. But the number was less than 10%. Even at $10.00 per gallon, the fixed costs of car ownership are much higher than gas costs.
Do the math. Suppose I am a caraholic with a car that gets 35 MPG and I drive 10 miles each way to work. Then my daily round trip is a little more than 1/2 gallon of gasoline. If gasoline hits $10 per gallon am I going to shell out $6 per day to keep driving? I sure am!
“Suppose I am a caraholic with a car that gets 35 MPG and I drive 10 miles each way to work….”
True, but suppose you’re a low income worker with a beat up car that barely gets 20 mpg highway and you drive 10 miles each way. Very few people get anything close to 35 mpg on their commute; it’s a lot of stop & go. That beater car will probably get 18 mpg on the commute. At 18 mpg that $5 a gallon costs you $5.55 a day for the commute; at $10 it’s $11.11 a day. If you’re making $30K a year that adds up to $2,777 a year to commute; 9% of your annual gross income.
Oil companies look at permanent refinery cutbacks
http://www.latimes.com/business/la-fi-refineries11-2010mar11,0,5317635.story?page=1
. . .
“Energy industry executives say they are facing up to what was previously inconceivable: that the nation’s appetite for petroleum products may never return to levels seen earlier in the decade, even if a strong economic recovery takes hold.
“None of us will sell more gasoline than we did in 2007,” Tony Heyward, group CEO for oil giant BP, said during a recent earnings teleconference.
For motorists, talk of refinery cuts promises to be anything but cheap. It’s feared that leaner supplies will translate into higher pump prices punctuated by expensive spikes when operations are disrupted by weather or other events.
. . .
If gasoline doesn’t seem particularly cheap these days, that’s because operators are keeping a tight lid on production; U.S. and European refineries are running at the lowest rate in more than a decade, Gheit said.
Still, compared with demand, there are too many refineries, he said, and an estimated 3 million barrels a day of excess capacity in the U.S. and Europe must disappear to achieve sustained improvement in earnings.
. . .
Critics complained that no new U.S. refinery had been built since 1976, leaving the country’s gasoline supplies vulnerable. In fact, between 1998 and 2009, U.S. refining capacity increased by 2.2 million barrels a day, to 17.67 million barrels a day, with the addition of equipment and with improved processes at existing facilities, Energy Department data show.
Refiners raked in big profits from 2003 to 2006, but “by 2007, it was largely over,” said Tom Kloza, chief oil analyst for the Oil Price Information Service, an energy information firm in Wall, N.J.
“Now, along with very weak demand numbers for gasoline, everything points to biofuels getting a larger and larger share in the future.”
I think there is a small window of time when gas prices are high and there are not enough other options avialable (like hybrid or electric cars) that you may see some people switch over to bikes and public transit. That’s what caused me to re-consider biking. But so did environmental and health reasons.
But as Keri and Mighk has pointed out countless times, you haven’t changed the mind-set of these folks who drive every day, and you’re still not getting people to pay for the true costs of auto ownership (including health and environmental factors).
So it’s hard for me to see large change like this happening on a macro scale. I think you are more likely to see change on a smaller scale — a “grass roots” type effort to pull people out of their autos and into other methods of transportation.
Yes, but it is interesting to watch things changing. I can see an ebb and flow in the number of cyclists directly related to the price of fuel.
Central Florida doesn’t have the elasticity that other places do, mostly because we a ton of poorly paying service jobs. When the price of gas goes up 30 cents a gallon (as has happened in the last 3 months) people begin to alter their behavior. I’m not saying that they quit driving, but they combine trips. When the price rises higher, they begin thinking hard about things like long trips.
People are beginning to catch on to the idea that the oil boyz are controlling the prices, not supply and demand.
Gas prices are not isolated to transportation costs. The costs of food and other essential goods will also go up.
“All together the food-processing industry in the United States uses about ten calories of fossil-fuel energy for every calorie of food energy it produces.” (from The Oil We Eat, Harpers Magazine) http://www.harpers.org/archive/2004/02/0079915
So the economic stresses of high fuel prices will not come in isolation, and the lowest income individuals and families will be the first to abandon their cars. In Central Florida affordable housing tends to be far away from major job centers, so lower income workers will have to perhaps take lower wage jobs closer to home in order to dump a car and save money.
“In Central Florida affordable housing tends to be far away from major job centers”
Stemming from Zoning 101 classes after WWII. We have strip zoning and spot zoning and area zoning, but we don’t have energy efficient zoning.
Putting office space in the midst of a residential area is “spot zoning” and considered to be a bad thing. Putting residential units in the midst of industrial areas is also a “bad thing.” Yet workers can live nearby those dreadful areas and commute at less expense. Is that a bad thing?
Kevin Love nailed it. At $4 per gallon, I can achieve a net time savings working as a barista to feed a gasoline habit. At $10 per gallon, I have to work a token amount of OT and be more careful about combining trips. Maybe let the kids take the bus to school. High petro cost hits the grocery bill a lot more severely.