November 22, 2014

If The Price of Gas Matters to Your Family Budget, You Are Doing It Wrong

The Lesson: It is not the cost of a gallon of gasoline that counts.  It is the inflation-adjusted cost of a mile driven that matters.

As I read the Chicago Tribune, I came across an Associated Press article called Gas Takes Its Biggest Bite Out of Family Budget In 30 Years.  That piece states:

When holiday travel is over, the typical American household will have spent $4,155 filling up this year, a record. That is 8.4 percent of what the median family takes in, the highest share since 1981.

There was a comment left by someone named Albi8gensian that brought me so much joy because it exactly identifies what is really happening (I’ve corrected some of the typos):

A better headline would be, “Average American CHOOSES to spend $4,155 per year for motor fuel.”

Because, for most it is a choice. Most Americans could get by with a smaller, less powerful vehicle, and/or they could drive less.

They don’t, because they are willing to pay extra so they can drive more, in larger, more powerful vehicles.

$4,155 at $3.50/gal is 1187 gallons. At 35mpg, that’s 41,550 miles per year.  At 35mpg, that’s about ten cents per mile for fuel- which surely is less than other per-mile costs of using a car.

The article implies that other purchases are being cut back to pay for motor fuel. Perhaps they are, but if so, it’s because Americans value mobility and power and size more than they value other ways in which they could have spent this moeny.

For what it’s worth, I think one could make a case that the inflation-adjusted, per-mile cost of driving is lower now than it was in 1955- because although gasoline costs about twice as much (adjusted for inflation), most cars get twice as high mpg. And they last longer, and have lower maintenance costs.

Yes!  A thousand times yes!  Whoever wrote this comment is evaluating not only opportunity cost, but the inflation-adjusted per-mile utility in real economic terms.  This is how you should be thinking.  If you want to see the world for what it is so you can adjust for it and get your family the things you want and need, this is the most efficient framework for achieving that end goal.

Some Historical Perspective on the Price of Gas

Fuel efficiency means that on a per mile travelled basis, gasoline is cheaper than it has been for much of the past century.  It is only a problem because certain demographics, such as males with only a high school degree, have seen inflation-adjusted decreases in real wage income and have no sense of history.

Let’s look at raw gasoline costs from 1950 and compare them with today.  Take a moment to glance at this historical chart, which shows the average fuel efficiency in 1950 was 13.9 miles per gallon. That same year, the average price of a gallon of gasoline was 27¢, or $2.42 today.  That means to travel 1 mile cost 1.94¢ in 1950’s terms.  Adjusted for inflation, that is roughly 17.41¢ per mile today.

The current national average for a gallon of gasoline is $3.23 and the average fuel economy is at an all-time best at around 22.4 miles per gallon according to the EPA.  That means it costs roughly 14.42¢ per mile in gasoline today.

In other words, every mile you travel today costs 2.99¢ less in raw gasoline terms than it did in 1950.  If you drive 15,000 miles a year, your real fuel expenses are $448.50 less than they were for your grandparents or great-grandparents.  Plus, you likely have heating, air conditioning, satellite radio, navigation, iPod hookups, and better safety standards.

We’ve Already Discussed the Fact that Gasoline Prices Shouldn’t Matter to You

Early this year, we looked at the year-end historical data estimates from AAA regarding what it would cost to own a car in 2011 in the United States.  Even then, I told you that if the price of gas cuts into your family budget, you are doing it wrong.  Even when my income and net worth were much lower, I always kept automobile expenditures to such a tiny percentage of my operating costs that it didn’t matter if gasoline was $1 a gallon or $5 a gallon.  It shouldn’t matter to you, either.  If it does, you are living dangerously on the financial edge.  

Inflation-Adjusted Gasoline Prices Copyright ThinkstockIf you live 50+ miles away from work, drive a fuel inefficient vehicle, and allow transportation costs to eat into more than 5% of your after-tax household budget, it is your own fault.  It is wasted money.  Even worse, when you factor in the additional commute time to value your per hour compensation, it is likely you are earning far less per unit of time than you think.

This begs the question: If gasoline is far cheaper on a per mile traveled basis than it was in the 1950’s, why weren’t our grandparents complaining the same way society does today?  First, the sense of entitlement wasn’t nearly as prevalent in the generations coming off the farm because they knew how to work.  If you wanted to eat, you had to rise before dawn to milk the cow, collect the eggs, and feed the goat.  Many of my older family members grew up on farms and this was an integral part of their lives.  

Even more than that, most of them weren’t living paycheck-to-paycheck because leverage ratios were far lower in the past.  They bought a home to pay off completely.  They saved cash to buy a single family car.  They didn’t put furniture on credit cards.  It’s amazing how much extra cash you have when you aren’t sending the bank double-digit interest charges and fees.

Having a nice car is a wonderful luxury, but it is precisely that – a luxury.  There is something fundamentally perverse when the biggest asset owned by most households other than their primary residence is an automobile that is virtually guaranteed to lose all of its value.  Worse yet, it is often financed and costs thousands of dollars in interest expense on top of the purchase price.  

  • Teeka T.

    Thank you for doing the work on this article.  It was eye opening to say the least. Your writing is getting me to start looking at things very differently and that is very refreshing. It makes me feel young again.

    -T

    • Joshua Kennon

      Thank you for the compliment; I’m glad you found it useful.  Welcome to the site!

  • Brian

    This article while relevant is a flawed as well. Sure, compared to 50 years ago the price of driving one mile is cheaper, but let’s compare to a shorter time period, about 10 years ago. The fact is that gas adjusted for inflation 10 years ago was still a lot cheaper than it is today. You comparison is the equivalent of saying that is someone dies at 65 today it’s ok because life expectancy just 100 years ago was only 45 so that person lives a long life. 

    • Joshua Kennon

      True, commodity prices tend to adjust around a mean trend-line, sometimes going higher, sometimes lower. Also true is that a decade ago, prices appeared incredibly cheap.

      A major reason commodity prices were relatively low at that time was that throughout the 1990’s, the split rule of President Bill Clinton’s pay-as-you-go policy with Speaker of the House Newt Gingrich’s take-no-prisoners approach on expenses produced gridlock in the Federal government. Combine that with a soaring stock market driven by the Internet boom, and you get major government surpluses. That makes the dollar more valuable, meaning it costs far less “dollars” to import one barrel of oil. The result? Oil and gas cost less in dollars. You also had a rare scenario in which other forces drove the cost of crude per barrel down to unsustainable lows that hadn’t been seen in decades.

      For the consumer, it was the opposite of a perfect storm. It was a perfect sunny day. It was a fluke; an outlier. Anyone who expected it to last, or considered that the new “normal” believes in the economic equivalent of pixy dust and fairy tales.

      In other words, oil increased at the same time the the dollar decreased. But that had to happen because the only way we have out of this mess is to depreciate the currency by running massive debts, effectively replacing the artificial money that was created by bank lending with another form of money (in this case, currency). The inflation – or, really, depreciation of the dollar – is merely a way to transfer money from savers to debtors so we can get out of the mess as a nation faster. Gas prices are just a symptom of that macro-level event. The alternative is to balance the budget immediately and throw us into a deflationary death spiral. Sure, the price of gas will be 10¢ a gallon then. But no one will have a job, house, car, or food.

      The problem is with a population that feels “entitled” to nearly free energy without investing in the technology to produce it. Gas prices today are rational relative to demand and the value of the dollar. It costs less to drive a mile than it did throughout almost all of American history. The problem is people becoming entitled, thinking it is their “right” to have cheap transportation regardless of the consequences. They don’t. If gas goes to $20 per gallon, it’s just too damn bad. People need to adjust. I don’t have a problem with people driving massive Hummers and burning oil in their front yard. I have a problem with people thinking they have a right to do it and then complaining about the price. It is ridiculous that the average American home has two vehicles and that those represent the largest investment after the home itself. It’s a near guaranteed recipe to stay poor. Most people wouldn’t dream of investing $25,000 a pop, yet they’ll borrow that to buy an asset that will become worthless, pay sales tax on it, pay property tax on it, and then pay interest on the money they borrowed to a bank.

      • Brian

        I agree with your last paragraph, having cars as an “investment” is certainly a recipe to stay poor.  

        And I do see your point, given that the 90’s were an outlier of favorable market conditions, we can’t really take that into consideration in the grand scheme of things in relation to gas prices at least. 

        However, let’s look at this from a different angle. Let’s say that yes it is “cheaper” to drive a mile today than it ever has been. But how has purchasing power of the average American held up during this time? Even though its cheaper to buy gas from a price point perspective, does the average American have as much money to spend on gas today as they did 30 years ago? Or is there less money to spend due to unfavorable economic conditions such as downsizing and such?

        I ask this because it seems that this gripe about gas prices is a relatively new phenomenon. Having spoken to many people, they all claim that back in the day gas prices were hardly discussed or worried about. Maybe people are just looking for things to complain about, who knows…….

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