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Dealing with gas-price shocks

By Claes Bell ·
Wednesday, March 9, 2011
Posted: 1 pm ET

The biggest news of the past few weeks for drivers is undoubtedly the meteoric rise in gas prices. Right now, my $4 per gallon prediction for this summer is looking a little low. According to Department of Energy, the average retail price of a gallon of gasoline has risen more than 30 cents in just two weeks, from $3.174 to $3.502.

Undoubtedly, a big part of that rise in prices can be attributed to the recent wave of political instability in the Middle East. I'm going to go out on a limb and say that's going to be a continuing problem, especially when you consider that problems in Libya, which only produces 2 percent of the world's total oil production, have had this big of an impact on the price of gas.

This chart of gas prices from the Department of Energy shows a clear trend in gas prices, and it's not down.

This chart of gas prices from the Department of Energy shows a clear trend in gas prices, and it's not down.

Try to imagine if Saudi Arabia, which produces a little under 10 percent of the world's oil and is the world's top exporter, were to descend into political anarchy? Or Kuwait? Or Iran? Or, if you want an even scarier scenario, what if the new Egyptian government decides it's going to level a 30 percent duty on all oil shipments that go through the Suez Canal? You get the idea. Fact is, if you're betting oil prices will level off or go down in the long term, you're betting on political stability in the Middle East, and that's not a bet I would take.

So if oil price shocks are inevitable, the question is, what do American drivers do to minimize their negative impact? Here are a few ideas.

  • Don't buy more car than you need. It's amazing to me that I still see lone drivers commuting to work in F-250s, Suburbans and Expeditions. Maybe some of them have huge families or heavy machinery they have to drive around on the weekends, but I don't think all of them do, and the cost of hauling around two extra TONS of steel is going to be prohibitively expensive in the coming years. If you're like me and the idea of having a large car or SUV for road trips is appealing, consider renting for those big trips instead.
  • Go high-mileage. If you're in the market for a new car today and you think gas prices are high now, where do you think they will be by the time you've paid off your auto loan? American car shoppers tend to be hypersensitive to swings in gas prices. When gas prices fall below a psychologically important threshold, say $3, they're more likely to consider a gas-guzzler, even though a behemoth SUV isn't really all that much cheaper to operate at $2.75 a gallon than at $3.25. We saw some of that in 2010, when truck and SUV sales surged in response to relatively low gas prices. Now, of course, consumer preference will swing wildly the other way, but regardless of short-term jumps or drops in gas prices, a high-mileage car makes sense, because the long-term trend is up. And anyway, it's always cheaper to use less gas, regardless of whether the price per gallon is $2.75 or $3.75.
  • Consider hybrid, electric or diesel. The higher gas prices go, the more sense it makes to consider a potentially pricier alternative drive train. For instance, Edmunds pegs the break even time for a hybrid upgrade on a Ford Fusion at 6.6 years when gas is $3.11 a gallon. If a gallon of gas goes to $4, though, my back-of-the-envelope calculations plug it at 5.1 years. Seeing as how the Federal Reserve plugs the average term of an auto loan at 63 months, that at $4 a gallon, most people will see significant savings before their loan is paid off.
  • Carpool. Even if there's no one at work who you'd want to carpool with, that doesn't rule carpooling out. Many state departments of transportation now offer free carpool matching services that can connect you with multiple carpool options.
  • Move closer to work. Regardless of where gas prices end up in the next few years, living closer to where you work will save you money. If you're renting and not stuck in an underwater mortgage, it may make sense to move closer to work, even if that means paying  a little more in rent.
  • Use public transportation more often. The American Public Transportation Association says exclusively riding public transportation saves individuals an average of $9,904 a year over driving. Practically speaking, a lot of households are going to need to keep a car around, but driving 50 percent less a year will likely save you significant quantities of cash, especially if high gas prices persist.
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March 10, 2011 at 3:03 pm

I think that drilling in the US would do almost nothing to help WORLD oil prices. Just because the oil came from the US, we would not get it cheaper or even get first dibs. Just ask the people on the Gulf area if they get cheaper gas. We could spend our tax dollars much better on cheap and efficient public transportation and it would cost a fraction of what the gov't would kick in for offshore drilling.

Claes Bell
March 10, 2011 at 11:41 am

I feel for you, ngan. It's too bad your company chose to relocate and extend your commute. You highlight a couple of reasons why insulating yourself from gas-price shocks is tough. Postwar U.S. urban planning and infrastructure are largely designed around the auto and the Interstate highway system, and a lot of communities are both extremely spread out and serviced by really bad public transportation. Where I live, late public transportation is the rule rather than the exception, and since a lot of people are underwater on their homes, they can rarely move closer to work.

March 10, 2011 at 11:34 am

The first three suggestions are useful only if you are in the market for a car. My family has two cars that we own outright. I drive 25 miles one way to my work because they relocated. I used to drive 4 miles to the subway to get to work. I'm not in the market to switch out the car.

Carpool - i do that, but i am the one to drive cuz the other people are on the way to work. they do chip in for gas money tho.

Move closer - impossible since i own a house and my husband works about 4 miles from home.

public transportation - almost impossible. it would add about 30 mins to my commute (total of over an hr). With two small kids and having to pick them up after work from daycare, i can't afford the extra time and the chance if i miss my connecting transfer, i'll be even more late.

March 10, 2011 at 11:08 am

Yeah,moving closer to work is definitely cheaper^

Claes Bell
March 10, 2011 at 9:28 am

Shantique, thanks for your comments. I think you're right that some of the remedies I suggest aren't easy, and are more of a long-term solution than a short-term one.
That being said, the numbers show clearly that lifting bans on drilling in environmentally sensitive areas in the U.S. is not the answer. Drilling in every single national park and protected area would be highly lucrative for oil companies, but it would not even come close to replacing the production of Libya in the short or long-term. In total, the United States has less than 2.5 percent of the world's proven oil reserves, but we use 25 percent of the world's produced oil. There is no mathematical way the U.S. can produce enough oil on its own to satisfy our current needs. So in my opinion, the answer has to come on the demand side, by improving fuel economy and reducing miles driven in the short term, and transitioning to other energy sources as quickly as possible in the long term.

March 10, 2011 at 9:16 am

You left off one of the easiest things we can do to help with the pain of gas prices! None of the things above can be quickly and easily accomplished in the current economic environment, and it's unrealistic!

Instead people should be calling their government representatives and telling them to LIFT THE SANCTIONS on drilling in the US.

I love nature and all its creatures, but I REALLY LOVE my two daughters more (it's just instinct)!

If we stop relying on these completely unstable countries (and their insane leaders) for our oil, we would not have this problem! We should continue research into alternative energies, but RIGHT NOW we can alleviate some of the pressure, by tapping the resources we have right here in our OWN COUNTRY!