How oil prices effect prices at the pumps and the family budget

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How oil prices effect prices at the pumps and the family budget (7/25/06)

The relationship between oil* and gas prices has always been a bit murky to the average consumer at the pump. The other day I realized I could take the MPG data I've been collecting and, if I could find it, historical oil prices to discover the relationship between the two. I.e. when the news says the price has skyrocketed, what does that mean for those of us at the pump?

Thankfully, Union Pacific came through and had the oil barrel price data for free. Here is the scare graphic everyone is looking for:

Oil and Gas prices comparison, gas x 25

I'd heard gas prices lag behind oil prices by a few weeks, and from the graphic you can see that stopped being true around September of 2005. Right now they are neck and neck, so consumers can expect prices to rise at the pump within days after they rise for barrels of oil.

My astute readers will have noticed something suspect about that graphic though... we don't pay $40/gallon at the pump. Actually, I had to multiply the $/gallon price by 25 to get two lines we could compare. Here is the real graphic:

Oil and Gas prices comparison

Boring, isn't it? That's the problem with pump prices. Fluctuations in oil prices get pressed out a bit and almost never take place on the same scale. Increases, or decreases for that matter, have to be divided by 25 to see the impact on gas prices. So an increase to $90 a barrel comes out to about $3.60 a gallon at the pumps. By and large this is because we've managed to prevent inflation from increasing oil and gas prices while it has increased our salaries and bills. What we spend on gas is a much smaller percentage of our monthly budget than it was two or three decades ago, and things have changed since then to better our position in case of another gas crisis, including the addition of the petroleum reserve, CAFE standards, more fuel efficient cars, and a diversified energy portfolio including wind, nuclear, cleaner coal, and bio options.

So what about the average Joe? HUD's AHS data tells us he commutes 26.8 miles a day. Let's say he drives a 20mpg vehicle, which figures out to about 30 gallons of gas used per month. At $2/gallon he is spending $60 on gas. $3/gallon makes that $90. The infinitesimal increases Joe is seeing now should not be breaking his budget. If they are, Joe has bigger problems than the price of oil.

For reference, I drive over 100 miles a day. That's about 2,800 miles a month. My Corolla gets about 37MPG and in a typical month I use 80 gallons of gas, environmentally offset by a Terrapass of course. The increase so far has cost me $80/month.

Now here is the depressing part. Even for me, financially, it just doesn't make sense to buy a hybrid car. The Prius is the only one that would significantly raise my mpg and costs $21,725. My Corolla was $15,315, a difference of $6,410. That difference works out to $100/month over 5 years, meaning pump prices would need to hit $3.25/gallon before I'd even bother doing this math again with the loans and everything else calculated in, and I'll tell you now it wouldn't be worth it till $4/gallon probably. The mpg boost wouldn't be great enough to substantiate the extra cost of the vehicle, the loan, the hit on the trade in value, et cetera. The Terrapass cost me $160, which is less than two months of the Hybrid cost with the same net effect. Folks buying their first car or who have paid off their current car should look at a hybrid though, because of the tax credit. Without the loan burden holding you down the cost is just about right.

* I'm not sure if anyone will be interested, but in the US prices are usually for "West Texas Intermediate/Light Sweet Crude" or Brent oil.