Monday, May 02, 2005

Why pricey gas doesn't really cut driving or increase transit usage

Great editorial in Forbes on the economics of driving. His provocative title: "$3 Gas? We'll Shrug It Off."

"If your car ran on unrefined $42-a-barrel crude and got 20 miles per gallon, fuel would cost you a nickel a mile. But add in the cost of turning crude into gasoline and gasoline into miles--i.e., the amortized cost of refinery and car, plus taxes (which pay for the highway, among other things) and insurance--and the mile runs you 30 cents to 50 cents. The IRS lets you expense 37.5 cents per mile for business travel in your own car. The American Automobile Association estimates that it cost an average of 56 cents per mile to drive a new car in 2004. Or to put it another way, driving would be only 15% cheaper, at most, if crude oil were free, or if your car engine delivered 1,000 miles per gallon. Grumble though we may at the pump, drivers buy miles, not barrels. And when the price of crude doubles--rising from, say, $28 a barrel to $56--the price of the average mile rises only 10% to 15%. That just isn't enough to impel most of us to change our behavior very much."


"The length of your daily commute is the other key factor that strongly affects how much gas you burn. But if living 10 miles farther from your workplace saves you $5,000 a year in property taxes and other carrying costs on the house you want, that translates into a dollar a mile in savings. If it takes an oversize gas-guzzler to make those extra miles bearable, or even pleasant, you'll buy it."

That stat really hit me between the eyes: free gas only cuts driving costs 15%, which means doubling the price of gas only increases driving costs 15%. This is yet another nail in the coffin for James Howard Knustler's arguments that our civilization is about collapse from higher oil prices. It also means that higher gas prices aren't going to do much in the way of getting more people on transit or living closer to their jobs.


At 10:52 PM, May 02, 2005, Blogger hcpark said...

Good post. I agree that many people (esp Houstonians) are not so afraid of $2.50 gas. OK, there are folks that are driving 80 miles for their commute. And many are changing driving or car-buying habits.

Not to contradict the items in the post (I also advocate a "total cost" perspective). However, the economist in me says, "what's the marginal cost?". Tolls, time, and gas are marginal costs. So is amortization from mileage. But for most of us, insurance is seen as a "sunk cost". And your monthly payments are the same no matter what you drive. For most of us "gas" is THE marginal cost. We complain about time in traffic, but most of don't know how to value that.

At 11:04 PM, May 02, 2005, Blogger Tory Gattis said...

"We complain about time in traffic, but most of don't know how to value that."

Interesting you should mention that. I wouldn't mind seeing a legal notification requirement for potential home buyers. Something giving the true costs of driving and estimated commute times to various popular job centers at various times of the day. I'm not talking about putting a big burden on developers or home sellers - Transtar could create a web site that lets you plug in an address and calculate the estimates based on their knowledge of average freeway traffic speeds. But I think it would be helpful if people were required to see and sign this information before making a home purchase decision.

Maybe the same thing could apply to fully loaded cost/mile information for buying new cars.

At 11:28 PM, May 02, 2005, Anonymous Richard R. Johnson said...

If your household transportation costs are $10k per year to begin with, which I believe is roughly correct, and you're talking about adding 15% to that, that's an extra $1,500 annually. Not completely insignificant. And the cost per mile to drive a gas guzzler is going to be higher than the average cost per mile that was cited in the article, so that extra $1,500 is low for those with less efficient cars.

Goldman Sachs recently predicted that we could see oil spiking over $100 a barrel, so now we're talking another doubling. That brings us to $3,000 per year in additional household transportation costs, again more for inefficient cars.

Sure, there will be plenty of households that don't change their behavior at all. But there will be plenty of others that either buy more efficient cars, or start looking into carpooling or taking transit alternatives if available, and still others who will decide to move closer in to town/closer to their jobs and save on transportation costs, not to mention time.

And that comment from the article about saving $5k on property taxes by moving 10 miles farther out is a bit of a farce. In metro Houston, you will find that the tax rates for suburban cities like Katy, League City, Pearland, and Jersey Village are pretty equivalent to the City of Houston. In suburban areas with MUDs, the total overlapping tax rate can be quite a bit higher than in the City of Houston.

And as I look at my property tax bill, I wonder what sort of mansion the author is living in that (s)he would save $5k per year by moving from one jurisdiction to another.

At 9:40 AM, May 03, 2005, Blogger Tory Gattis said...

I imagine the $5K/year savings may be more of an east or west coast thing rather than Houston. It's not just the tax rate, but the cost of the house which creates the total tax and mortage bill - and you can usually get more house cheaper by going farther out.

At 12:32 PM, May 03, 2005, Anonymous Richard R. Johnson said...

You are correct that the total tax bill is a function of both the rate and the assessed value of the dwelling.

For illustrative purposes, let's assume for a moment that the total overlapping tax rates are identical for a fictional in-city and suburban dwelling 10 miles away (the distance mentioned in the article). That would mean that the difference in the assessed value of the dwellings would be $500,000 in order to generate a difference in property taxes of $5,000. While we can probably dig up a few instances in the US where this is true, it is much easier to find instances where this is not. I think the author of the Forbes article erred by including the figure that (s)he did.

At 1:17 PM, May 03, 2005, Blogger Tory Gattis said...

His quote is "...saves you $5,000 a year in property taxes and other carrying costs"

I think he's including mortgage payments in the "other carrying costs", so it's not just property taxes, but your overall house note (inc. taxes).

At 2:38 PM, May 03, 2005, Anonymous Richard R. Johnson said...

You are right - I breezed right over the phrase "and other carrying costs on the house" and focused exclusively on property taxes. My bad.


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