Friday, August 05, 2005


Gas Prices Will not Impact Habits

My brother-in-law visited recently. A bright, likeable guy, we had an enjoyable chat. He asserted, with some confidence, that we will see "a lot more" hybrid cars in the near future.

"Nah," I said. "People won't give up their SUVs."

But was I right?

Of course, perception is everything in sales and right now, the perception is that gas prices are in control. Well, facts do alter perceptions sooner or later. Even if the news media can only cover one story at a time, facts do become known.

So, let's do some math -- no, no, I mean, I've done some math that I'll share.

Suppose your shiny new SUV cost you $35,000. If you take out a five year loan at 7.5% interest, the monthly payments will cost $701.33. Add $100.00 for insurance: now the cost is $801.33. Add $50.00 monthly for maintenance (over the life of the vehicle) and $20.00 for tax and license, the total monthly cost now comes to $871.33.

As we can already intuit, the added cost of fuel makes a much smaller impact as a percentage of the total cost than we naively assume.

Suppose this SUV gets 16 mpg, and we drive the rule-of-thumb average of 12,000 miles each year. That works out to 750 gallons of gas annually.

When gas cost only $1.25 a gallon, the annual cost would have been $937.50, or about $78.13 monthly. Added to the $871.33 above, the total cost of owning and operating our hypothetical SUV was $949.46. At $1.25 per gallon, fuel constituted about 8.2% of the cost of the SUV.

Suppose now the price of gas doubles to $2.50 per gallon. The annual cost shoots up to $1,875 or $156.25 monthly. The cost of operation of the SUV increases to $1,027.58 monthly, an increase of about 8.2%.

This analysis can be further refined by looking at changes in the cost of living and the various components that make up the cost of living, and also household incomes. Suffice it to say the cost-of-living adjustment for Social Security was 2.7% last year. Where I live, SUV loving Johnson County, KS, the median income for a family of four is $65,000. A 2.7% increase works out to $1,755.00, or almost enough to cover doubling the price of gas for 2 SUVs.

Of course, housing and health care costs are growing too, along with many other things. Prices of consumer goods from cars to computers are falling. Many once prosperous Johnson County families now suffer from "Sprint" syndrome -- seeing lucrative jobs evaporate and taking the hit. But even those people, at least the ones I'm personally acquainted with, kept their SUVs.

If we see gas prices of ten dollars a gallon within two years, lifestyles will change. If it takes much longer than that, the changes will work so slowly so as to be barely noticeable, except for some noisy moaning and complaining.

Let me put it another way. We've already heard lots of yells and screams, but the buses remain mostly empty.

I thought it might amuse you to know that gas is already at $2.60 / gallon for low grade in Northern California. Thankfully, I drive a little Integra which has great gas mileage.
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