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For today’s post I wanted to look into how my spending on gas as a percentage of my income has changed over the years. The period of time that this study covers is 2003 through present day. My initial guess would be that the percentage of my income that went to gas would be increasing over time since gas has continued to rise throughout this time period.

The data that I found initially may seem rather surprising, but you must keep in mind what I was up to during this time period. 2003 through present spans when I graduated from high school to after college graduation.

Here is the data:

• 2003 14.7%
• 2004 8.8%
• 2005 4.5%
• 2006 4.1%
• 2007 4.9%
• 2008 6.7%

Of all the years I would have to say that 2005 - 2008 have the most reliable data. 2007 should realistically be 7.3%, but it is much lower due to graduation presents that I received. The income that I used for my data was for just income in general no matter where it came from.

Is 6.7% high? Well, according to an article in the International Herald Tribune (the global version of the NY Times), “Americans spend 3.7 percent of their disposable income on transportation fuels. At its lowest point, that share was 1.9 percent in 1998, and at its highest it reached 4.5 percent in 1981.” So yes, as a percentage of income I am spending much more on gas than the average American. If I keep the same driving habits as I have right now, my take home income would have to increase by 82% in order to have my spending as a percentage of income be in line with the average American. Alternatively, I could choose to drive 45% less than I do now in order to be on par with everyone else.

Here are a few possible factors that might be keeping me above the national average:

• Some people do not drive, therefore they spend zero income on gas
• The average driver likely has a higher income than I do
• My car isn’t economical when it comes to gas
• My car uses premium fuel
• Gas prices in Seattle are among the highest in the nation.

When I was at the gym this evening I saw a story on the TV about a proposed “Gas Tax Holiday” for the summer driving season. Since I was too far away to read the subtitles I looked into it a bit once I got home. I found a nice article written by Nick Timiraos of the Wall Street Journal.

In the article titled “Will Voters Accept Obama’s Gas Plea?” we learn that Senator John McCain has proposed an elimination of the Federal Gas Tax from Memorial Day to Labor day. This would eliminate the 18.4 cent per gallon tax on unleaded fuel. Senator Hillary Clinton also supports this proposal. Senator Obama decided to take the rational approach and oppose this “holiday.”

The article suggests that Obama’s choice to oppose this tax relief act should put him in a “politically treacherous position.” The main reason for him being in troubled waters is because US consumers are fed up with high gas prices. The fact that he opposed a reduction in the price of gas could cause many people who were going to vote for him to vote for someone else.

This image was linked from opentravelinfo.com.

Politically, this move by McCain and Clinton is genius. At an average price of $3.60/gallon, the discount only amounts to a little over 5%. In reality that isn’t much to brag about, but the average person doesn’t look at it this way. To put this in simpler terms, in order for someone to save $100 in gas during this time period they would have to consume 543 gallons of fuel. At an average rate of 20 mpg, one would have to drive 10,860 miles over this three month span. If you annualized this mileage, it would be a pace of 43,440 miles for the year! Most leases penalize you if you drive over 36,000 miles over the course of three years!

“Obama has been positioning himself as a candidate who can win by telling voters hard truths rather than offering easy political solutions.” The easy political solution is to cut taxes for a short while to make consumers happy. In the end, a Gas Tax Holiday may be even more detrimental to the price of gasoline. In advertisements to Indiana and North Carolina voters, Obama makes the lack of savings crystal clear to voters. “You’re going to save about $25, $30, or half a tank of gas.” Although this doesn’t quite seem right, don’t forget to take my $100 in savings equation into consideration and then do the math. The savings are few and far between.

The only problem with Obama’s claim is that the average voter will likely think that they are saving a lot at the pump each time, but in the end this will not be the case entirely. When the price goes down by the amount of the tax, people will start to believe that gas has become much cheaper to them. As they think this, they will be more inclined to purchase even more gas. If the supply of gasoline is held at a constant rate and demand increases, then prices will naturally rise in order to reach equilibrium. This rise in price should offset whatever savings the consumer felt that they had saved from the lower prices.

One major option to reduce the amount of gas consumed each day is to increase gas taxes. The increase in taxes will raise the prices, and will cause demand to be reduced. Of course, no politician could ever run on the platform of increasing the gas tax by exorbitant amounts. That would eliminate any chance whatsoever of being elected.

In my opinion, something must be done to help wean the US off of our gasoline addiction. I believe that higher gas taxes, and/or increased toll roads would help promote more awareness on the issue. The funds from these taxes would be used to fund more mass transit options rather than improving existing roadways.

It should be interesting to see how the public reacts about Obama going the opposite direction on such a delicate issue such as this. A poll found in the New York Times shows just how the nation feels about gas taxes. It is obvious that Americans think wallet first, environment second.

Do you ever have those arguments where you know you are right, but it is not worth arguing your point because either the person is too hard-headed to admit they are wrong, or the concept is so far beyond their knowledge they won’t understand? A situation like this occurred to me today in the lunchroom. We were having a discussion on the price of gas. Gas prices in Seattle are much higher than in the rest of the country. Currently a gallon of regular costs about $3.51 a gallon.

A co-worker was discussing how he used to have a diesel car that got around 50 miles to the gallon and now drives a different car that gets only 35 MPG. He also talked about an SUV he had that got around 14 MPG. He started to go off about how he loved his SUV so much and didn’t care that it got such poor mileage and would be happy to pay even $5.00/gallon because it was worth it to drive that car.

Here comes the good part now. He then started to lecture the whole table that gas prices have been rising because demand has been dropping because of the higher prices. He claimed that when demand for gas dropped, stations would raise their prices so that they could increase their margins so that they can make the same amount of profit on less gas. Part of this is true. If a station increased prices while their costs remained the same, their margin would increase. If gallons purchased decreased by more than the increase in price, then the gas station will be losing money by taking this tactic.

Fortunately there are a few rules of economics that will prevail in a dense city environment such as Seattle. One of the main and most basic economic principles is the law of supply and demand. For instance, if you have a large supply and little demand you can generally conclude one of two things. The first could be that people just don’t want the product. With gas that is not the case since it is a necessity. The other could be that the price is just too high for people to want it. The other important principle is perfect knowledge of market prices. Sometimes stores will buy too much of a certain item. They notice that it is not selling very quickly and need to make room for a new shipment of the latest product. If they can’t get the old item sold, there will be no room for the new item. This is why stores often put items on sale. They have typically bought too much of the good because they anticipated more demand for it, and need to clear out the current inventory for new ones.

Another important economic principle is that all market participants have perfect knowledge of the market prices. This is especially true with gas stations. When a consumer sees two or three stations near each other, they can quickly gather all the price data and make a rational choice of what station will provide them with the best product for the money. If three stations are all near each other, they will tend to all have the same prices so that the consumer will just pick whichever one is the easiest to get to. When companies compete for attractive prices, they lower prices instead of raising them. If Shell is priced at $3.45/gallon and Chevron is priced at $3.51/gallon, people are going to go to Shell all day long because it gives them the best price. The Chevron will not gain by this increase because they will not have any customers. It we assume all consumers make rational decisions, we can assume that all consumers will choose to fill up at Shell.

In order for a station to raise prices in order to improve margins, all satations would have to be in on this pricing scheme in order for it to work. Remember, prices changes demand, and demand changes prices. This endless balancing act will continue until the product supplied is equal to the product demanded.

Gas prices continue to rise across the country. Here in Seattle, a gallon of regular costs $3.51 at the local Shell station. Seems crazy to think that about a year ago the price was about a dollar less. We have a few factors that are contributing to this rapid increase in price.

First of all is the obvious. Refining capacities can only go so high, and the demand for oil continues to rise each day. Using the classic model of supply and demand it is very easy to see why prices have risen. If we put more fuel efficient cars out on the roads we would theoretically demand less gas because we would be using less of it. I think that when people have vehicles that get better mileage they will drive more. They will use the better mileage as an excuse to drive more and make more unnecessary trips, causing them to demand exactly the same amount of fuel.

The second main reason that gas prices have risen is because the dollar has decreased in value in comparison to other world currencies. Think about it for a minute. Most of the gas that we consume we import from other countries. When we buy foreign oil, we must convert our currency into theirs to make the transaction. If we assume that the price of oil remains constant in a foreign currency, and our currency is losing strength to the foreign one, it is easy to see why the price of oil would greatly increase for us.

Imagine that in 2007 $1 was worth $5 in a foreign currency. If a barrel of oil cost $100 in the foreign currency, it would cost us $20 USD to buy the barrel. Suddenly in 2008 our $1 is only worth $4 in the foreign currency. That same barrel of oil still costs $100 though. Because of the change in the exchange rate, it now costs us $25 to buy that same barrel although the price in the foreign country has remained the same.

It is interesting to see how supply and demand are not the only controlling factors on the price of gas in the United States.