Monday, April 30, 2012


When prices go up Americans get crazy.  Some folks blame the President, some trade in conspiracy theories, though most of us simply feel misery every time we fill up.  When I'm at the pump, I feel like I'm in Vegas.  Flashing digits moving even more quickly than a electronic slot machine.  The pump itself selling me with video and audio.   And of course, the sinking feeling that comes with the knowledge that the house is winning and I'm losing.

Specific industries, like taxi cabs and truck drivers are surely hurt by rising gasoline prices.  But gas prices for me and other regular Joes and Janes don't actually matter nearly as much as we think they do.   A recent analysis by the AAA shows that the overall cost of car ownership has increased only slightly over the last year.  Just 1.9%.  That's less than the core inflation rate over the last year (for example, as measured by the Mar 2011 - Mar 2012 CPI rate of 2.7%).  And the cost of owning and operating your car is what really matters.  Not what you may be paying for gas in any particular month.  If you break down what your car insurance, car purchase price, financing, and servicing costs you over the life of your car, you'll see that gas is a relatively small fraction of the total life-cycle cost of driving (here's a typical calculator).

As James Surowiecki wrote in the New Yorker a year ago, increases in gas prices shouldn't matter as much as they do, when one looks at the numbers.  Surowiecki says that a (permanent) 85 cent increase would translate into a few hundred dollars a year for your average American household.  I come up with a similar figure of about $375 for a $1/gallon temporary increase.**  This ain't nothing, but it represents less than 1% of the median American household income

In any case, gasoline prices have been trending downwards in the US fairly strongly over the last month or two.  I guess all those folks who have been blaming the Obama administration for not doing enough about high gas prices will now publicly reverse themselves and praise the President for a job well done.

Or not.

**figured as follows:
       average driver estimated at 15,000 miles/year
       gas spike is estimated at $1/gal, and lasts 6 months
       average car estimated to get 20mpg
       ->>> [$1/gal increase]*[(7500miles)/(20mpg)] = $375