Saturday, March 22, 2008

Fueling the Gas Price Hype

America's financial outlook remains teetering in the balance. Warren Buffet says we are in a recession. The fed says we are in an economic downturn. Nonetheless, the housing market is still roiling, investment banks are bracing for more write downs, and oil is over $100 a barrel. Oil hit $107 a barrel last week before falling below $100 again. Gas remains over $3 a gallon and is predicted to climb to as high as $4.50 a gallon by late summer. It may even hit $5 a gallon by some predictions. There has been a lot of press about the price of gas. The oil embargo 1973 showed how high gas prices could cripple an economy. Certainly gas over $4 a gallon would be an ominous sign, but I would beg to differ.

I don't believe gas prices are really all that indicative of the general economic health. While it is in many respects a necessary resource for most people and businesses, it is not treated that way. I will argue that gas could go up to $6 a gallon until people actually curb their driving. There are three reasons why gas prices can climb much higher.

When you go to buy or lease a new car, there are certain qualities you look for. Surely, make, model, color, transmission, and cost are very important. You also look at the packages or perks--power anything, stereo, GPS, rear entertainment, moon roof, leather, heated seats, etc. But there is one thing that everyone looks at when buying or leasing a car, whether it is conscious or not--fuel efficiency. It's nearly impossible to miss. Numbers in large bold font right on the window sticker of every car, "18 mpg city, 25 mg hwy". We are all aware of the fuel efficiency of our vehicles, but do we register it? I would guess that if you asked a hundred people on the street why cars get less mileage in the city than on the highway, over 95 of them would have the right answer. Stop and go driving burns more fuel per distance traveled. More fuel is wasted by accelerating than by maintaining speed. This much is intuitive and does not require higher education. Yet every day as I drive to work there are people zipping in and out of lanes, racing to the get to the red light first, and tailgating if you aren't driving more than 10 miles over the speed limit. Does this aggressive driving waste more gas than cruising at the speed limit or even the common speed? Of course it does, and I think people know this. When gas is expensive enough that people actually drive less aggressively, then you'll know we have a gas crisis at hand.

Another reason people will spend $5 or $6 a gallon on gas is because they aren't paying for it. That's right, they aren't paying for it. What I am about to say may not be able to be proven, but given the history of people trying to cheat to IRS, I think it's more than likely true. Let's look at the big picture first. If gas prices go up, companies that deliver goods must pay more for gas. Which means that consumers in turn will pay more for goods, thus diverting the extra cost from the business. Companies have little incentive to stop driving because they are not taking the brunt of higher gas prices. But if there is a significant decrease in business because of the increase in prices from the increase in gas prices, they may decrease deliveries. Let's take it one step further. For people who have "company cars", they use that vehicle for both work and personal purposes. But I will guarantee that it all gets written down as "work" use and the company pays for all the gas. This may not seem like a terrible thing, especially for people who own their own business, since that money would come to them anyways, but that money will now also be tax deductible, offering more savings. Tell that someone who actually pays for gas with taxable income and see what he thinks about it. There is a reason the IRS is targeting more small businesses for audits now.

And the third reason gas can go up to $6 a gallon? Because people simply don't care that much, despite the hype fueled by the media.