High Gas Prices: A Result of High Demand for Gas

The news media is saturated with reports of motorists complaining about high gas prices. It’s probably been on every TV newscast and every newspaper recently. (The Sunday N.Y. Times had a detailed look at motorist behavior across the country and the Oil Drum assembled a list of other articles on gas prices.) Meanwhile, the Republican plan to give everyone a hundred smackers for their gasoline has been met with a huge (mostly negative) reaction.

But on an annual basis, the cost of gasoline is nothing compared with the cost of capital depreciation on your car. Here are the numbers from AAA’s latest survey of the annual costs of car ownership:

  • $3,392 — depreciation
  • $1,425 — gasoline (@ last year’s 2.40 a gallon)
  • $926 — insurance
  • $735 — maintenance
  • $716 — auto loan finance charges
  • $150 — tires
  • $490 — other
  • $7,834 — total

So gasoline accounts for a mere 18% of the annual cost of owning a car. Judging by the public outcry over $3 gasoline, you’d expect that gas prices are 85% or so. So why is everyone so obsessed with gasoline prices? Why doesn’t congress propose giving rebates for auto insurance or for auto depreciation?

One reason is that gas prices are in your face. They’re printed in huge numbers at every gas station across the country. But more important is that the costs of gas is most important cost that is paid on a per-trip basis, so it is the chief cost that weighs on people when they make the decision to take an individual trip. (The other big ones are tolls and parking fees.) Thus, it is the main cost that can affect someone’s decision to go for a drive. The other costs might affect one’s choice of what model to purchase, but not whether to drive or not. So high U.S. gas prices, even though they’re still among the lowest in the world, are hurting the American right to drive anywhere anytime. Vucan Vuchic explains the importance of fixed versus variable costs of driving in Transportation for Livable Cities, which is a great read for anyone interested in ways to reduce traffic congestion. He writes:

User direct costs for car travel consist mainly of gasoline, parking, and toll expenditures. These costs are somtimes referred to as “out-of-pocket costs.” They have by far the strongest impact on user behavior. Most drivers tend to consider these costs carefully while disregarding many costs that are fixed or that depend only indirectly on the amount of travel, despite the fact that they latter costs are often far greater than out-of-pocket costs.

One way to reduce traffic congestion without increasing the annual cost of driving is to increase variable (or per trip) costs of driving while simultaneously reducing fixed costs. A higher gas tax would encourage people to forego individual trips, thereby reducing the price of gas by decreasing demand.

- As Gas Prices Go Up, Impact Trickles Down [NYT]
- Stories from around the country [The Oil Drum]
- Sharp Reaction to G.O.P. Plan on Gas Rebate [NYT]
- AAA Study Finds Average Car Ownership Tops $7,800 Annually [Motortrend]
- Transportation for Livable Cities [Center for Urban Policy Research]

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5 Responses to High Gas Prices: A Result of High Demand for Gas

  1. Anonymous says:

    Very nice essay. Have you considered writing an op-ed on this point for the Times or one of the tabloids?

  2. peakguy says:

    I completely agree with anything that makes it more expensive from a variable cost perspective to drive an additional mile. Zipcar is trying to do this in their own way.

    As a former car owner, I know that the psychology is that you don’t think about depreciation – the car either runs or it doesn’t. If it doesn’t run, you pay to fix it. gas is the only true variable cost.

    My Metro card usage is far less than $1000, my annual bike costs are less then $100 and walking is free. That’s 99% of all my personal transportation requirements.

  3. AD says:

    Thanks Anon.
    Peakguy, don’t forget the costs of food and shoe leather. Walking isn’t totally free.

  4. Nick says:

    AAA seems to assume a new car. The average vehicle on the road is 10 years old (hard for to believe, isn’t it – we’re not average income, now are we….). So the average depreciation is maybe $750, not over $3,000.

    For the average person, gas prices really are a big % of their cost!

  5. Freaki says:

    Gas prices are stupidly high. There is no excuse for it. However I have found a way to save and even make money with the high gas prices. Give it a look see it really works. Reduce Your Fuel Bill