Rising gas prices might rain on the car buying decisions of those with
short memories
By Kevin M
It’s almost hard to conceive that only a couple of years ago we were struggling to come to grips with the relentless rise in the cost of gasoline, as prices rose from the nearly constant level of a dollar and change a gallon, to over $4 in a space of just a few short years.
$5 a gallon was looking inevitable, and maybe the new standard. SUVs and other large vehicles had become un-salable and were plunging in value.
In the intervening two years we’ve had a mortgage meltdown, a wave of bank failures, a presidential election and a killer recession—it’s no wonder the still relatively recent gas price spike is barely a shadowy memory.
But as much as we may have forgotten that crisis for newer ones, it’s left its mark on our finances. Though gas prices have fallen back from their peak, they’re still at least twice as high as they were before the spike began. And if we’re completely honest, they’re not all that far off the peak any more either. $2.75 to $3 a gallon only looks good because we were paying $4+ a couple of years earlier.
So should we put fuel economy aside as we celebrate an apparent recovery? Are “high” ($4+) gas prices a thing of the past? Is the world now safe for your Escalade?
Why gas prices might resume rising
When ever something isn’t in a state of crisis, it’s easy to forget how ugly it can get and how quickly it can get there. When it comes to gas prices, we should all know better by now.
I’m not a strict disciple of the Peak Oil crowd, but even a skeptic has to admit that their contentions are often nicely supported by the facts. As benign as oil prices seem to be at the moment, the potential for a resumption of the price increases experienced for most of the last decade is all around:
1. An improving economy—it was only the decline in the economy that finally reversed oil prices; the potential is real that an improving economy will cause a resumption of price increases,
2. Worldwide growth in demand–developing countries are now where the greatest growth in oil consumption is occurring, and there are a lot more people there than in North America, Japan and Europe,
3. Major shifts in production—the easy oil land fields are the ones maturing and giving out, while new production is largely coming from hostile environments off shore (increasingly way off shore), Siberia and the Artic Ocean. Not only is oil from these sources more costly to produce, it’s often more expensive to ship as well, and that ultimately means higher gasoline prices.
How this should impact our car buying decisions
No matter what you read or see, don’t buy into the cheap-gas-forever myth!
Since 1973 the world has experienced several severe reductions in oil production and even more periods of spectacularly rising prices, enough that no matter what the current price of a gallon of gas may be, when buying a car it’s best to assume the worst.
Even if gas is only 89 cents a gallon, when buying a car you need to ask if the vehicle you’re considering would make sense if fuel prices were to rise to $4, $5 or even $10 a gallon. To dismiss this possibility is to argue against reality itself.
And here’s a related issue we don’t much like to think about: should gas prices go that high, you may also be out of a job.
Oil has a multiplier effect; for better or worse, the entire global economy, including and especially the U.S. economy, are intimately linked with the price and supply of oil. There’s an inverse relationship between the price of oil and the economy–when the price of oil goes up, the economy goes down–so it isn’t only higher gasoline prices we’re facing when oil rises.
If you make your car buying decision based on the assumption of cheap-gas-forever—because it supports your desired outcome or for what ever other reason—you’ll be setting yourself up to face the double whammy of higher gas prices AND the inability to sell your high priced, gas guzzling vehicle into an economy that no longer desires or can afford such luxuries.
Fuel economy—it matters regardless of where the price of gasoline may be.
Kevin – Great post! At the right price, oil and its derivatives will never be scarce but our dollars, as defined by a barrel of oil, or portion thereof, could become so.
We agree that the developing world’s appetite for fuel, as a result of their own industrialization and economic expansion, will exponentially rise. As demand rises, prices will also have to rise. What will be truly disheartening and very surprising for some Americans will be to watch prices continuing to rise while their own demand is rapidly falling due to job loss, car pooling, downsizing from automobiles to motorcycles and scooters, motorized bikes, motorized skateboards, bicyles, and walking. We see $10.00 a gallon for fuel as being very realistic given the past economic indiscretions we’ve witnessed. It could go much higher based on current and future indiscretions by those running the printing presses. Oil and the dollar will continue to have an inverse relationship for some time to come.
Steven and Debra´s last blog ..The Tea Party Elephant in the Room
S&D, I completely agree. Throughout my life, oil/gasoline has be a persistent problem–in on again/off again fashion–but the general progression seems clear: prices are heading higher over the long term.
Even if prices are behaving, as they are now at relatively high levels, we should never take our eyes off the times when they spin out of control. Once prices start moving they tend to do so relentlesly. There won’t be time to adjust once that happens, so seriously considering it now is more important than we like to think about.
The human brain is blessed with a number of circuitry “enhancements” that help us cope with all the data available to us. Unfortunately, some of those enhancements don’t help us make better financial decisions. The temptation is to look at gas prices today and assume they will continue. In fact, real gas prices today are lower than they were in the 70′s and there are many reasons (most mentioned in this blog) why they will revert to that higher norm in the future.
A vehicle purchase is made on a 7-10 year time window. That’s how long the purchase is supposed to last. It is best to base that purchase on variables (including projected fuel costs) over that same time period, not just where prices are today.
John D. Buerger, CFP®´s last blog ..Betrayal
Well said John. A car is most definately a long term asset. If you buy a gas guzzler, because gas prices are low at the time of purchase, trading it out won’t be easy or profitable if gas prices skyrocket.
Based on the history of gas prices, and on the apparent lack of domestic control over their direction, it’s best to adopt a micro strategy that puts you in a position to deal effectively with the results of a sudden spike in prices.
Gas prices these days are just getting higher, i think the government should focus more on alternative energy..*`
I’m not a big fan of collective solutions, but if government is going to get involved in anything, energy alternatives strikes me as a worthy choice.
I’m not surprised gas prices are going to continue to rise. The power source industries are a static bunch; bearing an absolute refusal to change. I learned this when a few of the big dogs began to patent the electric car on the people.
That’s the thing about gas though. It’s that very mechanism of scarcity that drives profit, be it real or perceived.
I’m baffled that consumers just don’t catch onto this sort of thing, in spite of how obvious it is.
Aury (Thunderdrake)´s last blog ..Hoarding Dragon Basics – Investing in Precious Metals
I am sure gas prices will keep rising. What seems to make gas prices unique is that they fluctuate so wildly that people have strong reactions. The fact is, I personally have no alternative but to buy gas. We have a terrible mass transit system (well, nonexistent) where I live, so I drive. A lot.
Whereas this opinion may not be popular, fuel economy is not at the top of my list when I purchase a car. I have 3 kids and I am on the road constantly. I drive a crossover and I love it. No it isn’t a hybrid and it isn’t the most fuel efficient, but it is safe and comfortable. I did try to find the most fuel efficient car in the crossover category though.
Whenever I read about gas prices, I think back to when I was a kid and gas prices were over a dollar. Everyone was gong crazy and driving to Canada to get cheaper gas. We even had to buy a gas cap with a lock because someone had siphoned the gas out of our car overnight. Memories!
Everyday Tips´s last blog ..Tips for Traveling With Kids
Everyday Tips – I remember those days as well, and it seems as if we revisit them every few years. It’s only when the prices spike that we come face to face with the results of poor buying decisions on cars, fuel wise that is.
Back in the fall of 2008 we had an actual gasoline shortage here in Atlanta that gave us a glimpse of what life was like in a nearly gas-less world, and it wasn’t pretty. Commuting was being interfered with, shopping came to a near standstill, and civility was lost in the long lines at filling stations.
People driving hybrids and 40 mpg compacts were looking pretty smart, while those driving gas guzzling SUVs were looking…trapped!
Hybrids and electric cars are cool but at $20,000+ I can’t afford one. Most people can’t. Also, I refuse to drive a car that is as long as my bath tub.
I wasn’t thinking so much about hybrids when I wrote the post, but more about fuel efficient compacts and sub-compacts. There’s plenty of economy without going hybrid, plus it doesn’t seem as if hybrids are the cure all. You still have to put gas in them, and then there’s the electric bills…
It was concern over gas prices that caused us to buy a car with an efficient 4-cylinder engine for my husband. We know that while gas prices fluctuate and have returned to “lower” numbers ($2.45 around here for regular unleaded right now), they could bump back up to $4 and beyond in the blink of an eye. If they go lower, that’s just a bonus. We make sure our tires are properly inflated, drive the speed limit and change our air filters on schedule in order to maximize our cars’ fuel economy.
Rainy-Day Saver´s last blog ..Fix-It Friday: A Little Bit of This, A Little Bit of That
The government and crazy save the environment wackos want everyone to drive a car that is a long as my bath tub and gets 70mpg. And the car costs $30,000…. I can’t afford that. I can’t afford any new car.
Gas prices don’t need to rise. They only rise for one reason. Human greed.
FB–That’s why it’s so important to consider fuel efficiency when buying a car. All of the alternatives are prohibitively expensive, especially as fuel prices rise.