Thursday, January 3, 2008

When is Gas Truly Expensive?

"Motorists aren't waiting in long lines for gasoline. Consumers continue to spend. Affluent Americans remain barely affected."
WSJ - Oil's Rise to $100
In other words when will people start to make big changes to their lifestyle because of the price of gas. General consensus is that there is still some ways to go before gas prices truly start to have an impact on how we live.

What we have seen to far?
There have been impacts because of gas hovering around $3/gallon, like sales of gas guzzlers are down and hybrids sales are up. Beyond that we feel the pinch when you end up paying $40-$50 for a tank of gas but its only a pinch.

"The rising price of oil is starting to bite - at the pump, the airline ticket counter and possibly in your home"
CNN Money
So far consumer impacts have been limited – consumer spending is holding up, alternate modes of transportation are still not in vogue, public transportation is still not popular, commute times are not reducing and holiday road travel is continuing as usual.
Higher and higher
When is gas truly expensive?

All this when price of gas has increased 200% in the last 7 years. Yes – gas was around $1 a few years ago and today its at $3. With average driving distance of 15,000 miles/year and average gas mileage of 25 miles/gallon – you would have paid $600 in 2000 for gas and today you pay $1800. An increase of $1200/year or $100/month or about $3.33 per day.

When does it start to hurt?
How about $5/gallon gas! Obviously at that price there is a psychological impact but financially it's still another $100/month or $3.33 per day. So can you skip the latte and still keep driving the Hummer. Probably yes. Will you drive less – maybe a little but probably not change your lifestyle drastically. When you consider that average annual income in the US is $60,000 – then an additional expense of $1,200 per year is only a 2% expense. Although gas at $5 will impact other goods and services which will start to add up and crimp your spending habits.
"U.S. industry has so far managed to take the oil surge in stride, although economists fret that this may not last long."
WSJ - Oil Hits $100, Jolting Markets

When is gas truly expensive?
$5 gas will hurt but not change us fundamentally. Above $5 gas is when the expense starts to take a toll. At $10 you are looking at an additional expense of $3000/year. Now that is 5% of average annual income and just skipping lattes will not compensate for that expense. Now we are talking lifestyle changes.

Regular auto maintenance and good driving practices, buying high gas mileage vehicles, exploring alternate modes of transportation (walking, cycling and public transportation) are all prudent financial choices which put money in your pocket and help the environment. At $3/gallon its smart to conserve but the need to explore alternate transportation options definitely takes a priority as gas prices rise.
"The cure for high prices is high prices"
WSJ reports that some economists say oil prices in the long run will return to earth. They argue that consumers eventually will respond to price increases by cutting back consumption through less driving, greater efficiency and a switch to alternatives.

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