Commentary – Bad Habits: Coffee and Gasoline
Photo: Peter Tertzakian
I pulled into the filling station somewhat reluctantly. It was packed with a parade of cars, SUVs and pickup trucks, each jockeying for their turn to nourish their internal combustion engines with a tank of gasoline. I don’t like waiting. But I did, and after the ordeal I went into the station to buy a cup of coffee.
“What’s going on out there,” I asked the teller, “what’s with all the cars?”
“Don’t know sir,” said the teller, prompting me for my debit card. “Lots of people; I guess they like to drive.”
Good vague answer, I thought. Must be an economist. I thanked him and turned my mind to how much the price of gasoline has fallen in North American markets. In some American states the price per gallon dipped momentarily under a dollar, the first time since 1999.
Sitting back in my car I looked at my large coffee. On a volume basis, the java cost three-to-four-times as much as the stuff that comes out of the pumps. But that’s ok I thought, merging back onto the highway – at least I get good mental mileage out of a cup of coffee.
But here’s the thing: My gas station visit validated what I already was sensing. Back at the office I confirmed what was happening with charts and stats (see Figure 1). Collectively, we are all driving more in North America; especially in the showcase US market.
The total amount of driving is measured by a stat called “vehicle miles travelled” or VMT. Take all the cars and trucks in the US and add up the collective distance they drive in a year and you get VMT. In 2007 it hit an incomprehensible 3.04 trillion miles. That’s like going to back and forth to rescue Matt Damon from Mars over 6,000 times.
Annual VMT began stalling around 2006, understandably coinciding with a steady doubling of gas prices. Then in 2009, the Financial Crisis put a crimp on all wallets; further encouraging car-pooling, commuting less or staying home altogether for lack of employment. Consumers put the brakes on driving and even highway vacations became “staycations.” For the first time since the oil price shocks of the 1970s, consumers’ behaviour toward driving changed.
Now, a reversal of prices at the pumps is getting people to jump behind the wheel again. VMT in 2015 hit a new record: 3.15 trillion miles. And the trend line suggests a record rate of growth that is steeply continuing into 2016. I for one will be loath to line up at a touristy gas station again – cheap gas plus a better tone to the economy is almost certain to kick cars, SUVs and RVs into high gear by June. And US gasoline consumption? The last data point confirms a record level of consumption for this time of year.
Yet there’s more to this story. Cheap gas is also luring consumers into auto show rooms to buy bigger and heavier models – a renewed trend toward vehicle obesity. Pickup trucks and SUVs have inferior fuel economy due to their extra weight, slurping more gas per mile than lighter-weight passenger cars. Since US retail gasoline prices have halved over the past 20 months, the fraction of big vehicle sales has jumped from 52% to almost 60%. Not surprisingly, data shows that US sales-weighted fuel economy has flattened out over the same time period (after improving steadily from 20 mpg in 2007, to over 25.5 mpg by mid-2014; today it remains at 25.2 mpg).
Neither of these related phenomena is new. People consume more when price goes down. And when vehicles become more fuel efficient, consumers trade their new-found cost savings in for upsized vehicles and more driving.
I look at my screen and see that oil has risen to $40 a barrel. It’s too cheap to invest in future supply. But it’s low enough to produce cheap gasoline that everyone loves to consume. Who says economic theory isn’t working?
Some are. “Oil prices are going to stay low, because demand is going down,” is a thesis I often read and hear.
Who came up with that?
The data shows what any economist would say, and what any gas station attendant would see: consumption is going up, because oil/gasoline prices are low. And despite a lot of talk about changing attitudes toward climate change and other deleterious effects on our planet, vehicle sales data clearly shows that any sense of conservation gets lost when prices go down and efficiency goes up.
So it’s back to bad habits. The only commodity I can think of that’s harder to give up is coffee.
