Fall in Gas Prices and Less Driving Equals $315B Savings

by: Mark Perry November 21, 2008 | about stocks: OIL / USO    

Mark J. Perry, Ph.D.

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One way to adjust gasoline prices for inflation is to measure the price over time in terms of the number of minutes worked at the average wage to purchase a gallon of gas. Using the monthly nominal price of gas from the EIA, and the average hourly wage from the BLS via the St. Louis Fed, the chart above shows the cost of one gallon of gas at the average retail price measured in the number of minutes of work at the average hourly wage each month from January of 1980 to November 2008.

For example, when real gas prices peaked in 1981, it took almost 12 minutes of work at the average hourly wage of $7.29 to purchase a gallon of gas at the retail price of $1.42. When real gas prices bottomed out in early 1992, it only took 4.15 minutes of work at the average hourly wage of $13.30 to purchase a gallon of gas at the average retail price of $0.92. By June 2008, when gas was selling for $4.05 per gallon, it took 13.5 minutes of work at the hourly wage of $18 to purchase a gallon of gas.

Now that the national average price of gas has fallen to $1.99 per gallon (data here), it only takes 6.5 minutes of work at the average hourly wage of $18.25 (estimated) to purchase a gallon of gas, the lowest real price of gas since February 2004 (when gas was $1.65 and the average wage was $15.54), and about 50% of the cost in the early 1980s. And now that the price of gas has fallen to as low as $1.39 per gallon at some Kansas City stations (data here), it only takes 4.57 minutes of work there to purchase a gallon of gas. The last time the average price of gas nationally was that low was February 2002, almost 7 years ago!

The Federal Highway Administration reported Thursday that travel during September 2008 on all roads and streets fell by -4.2% compared to September last year. This drop follows the 5.6% August decline, which was the largest ever year-to-year decline recorded in a single month. Further, September marks the eleventh consecutive month of traffic volume decline compared to the same month in the previous year. Travel YTD through September 2008 fell by -3.5% compared to 2007.

The eleven consecutive monthly declines (November 2007 through September 2008) in miles driven compared to the same month in the previous year is close to a record, and represents one of the most significant adjustments to driving behavior in recent history.

On a moving 12-month total basis, traffic volume in September fell to 2,917 billion miles, the lowest level in almost five years - since February of 2004 (see chart above), and this measure of traffic volume has fallen in each of the last 8 months.

Bottom Line: The moving 12-month total traffic volume in September 2008 (2,917.2 billion) is below the September 2007 level (3,006.4 billion) by 89.2 billion annual miles driven. At an average fuel efficiency of 20 m.p.g., and an average gas price of $3.42 per gallon over that period (data here), that reduction in miles driven represents an annual savings of more than $15 billion for American consumers and businesses.

That's in addition to the much larger $300 billion expected annual savings for consumers from the drop in gas prices from $4.12 per gallon to $2.00 since July (gas price data here), since American consumers and businesses save about $1.42 billion annually for every penny decrease in gas prices (see calculation here).

Thanks to John Thacker for the FHA update.

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This article has 7 comments:

  •  
    Nov 21 08:30 AM
    Great article.
    Reply | Link to Comment
  •  
    Nov 21 08:36 AM
    well when people no longer drive to work because no jobs exist you might expect vehicle miles per month to drop off a wee but.
    > jack
    Reply | Link to Comment
  •  
    Nov 21 12:49 PM
    John,

    You are correct, the $5.00 a gallon caused every one to lose their jobs thanks to Big Oil and I am not sure even a $1.00 a gallon would bring all of the jobs lost back. History will show that BIG Oil is the United States worst enemy. Now that a barrel of Oil is down, they will raise gas prices using their old tried and true methods, A fly sneezed in a refinery and the refinery was down for 2 minutes(causing gas to go up 51 cents). ETC. Since 1974 Big oil has been behind every Recession. You watch them gas will not be low for long. It is a price-fixing Monopoly that has broken all free market principles since 1974. And since they own every Govt official, I am sure we will have hi priced gas again,recession or not.


    On Nov 21 08:36 AM john s. gordon wrote:

    > well when people no longer drive to work because no jobs exist you
    > might expect vehicle miles per month to drop off a wee but.
    Reply | Link to Comment
  •  
    Nov 21 02:37 PM
    The second savings is somewhat fictitious since much of that reduction is due to the increased ridership on mass transportation. While mass transportaion leads to less miles driven it does not necssarily cost less. Ridership in northern Va. on the commuter rail is up more than1m this year but to ride 30 miles round trip costs 13.40. At 20 mi/gallon and 4.29 per gallon at the peak cost ,the out of pocket cost isn't less. GM kid, big oil might have been resposible for some of the rise in cost, but just to be sure, I would initiate a rule that commodity buyers put up 80 cfents on the dollar to buy a commodity. Hedge funds and the big pension funds like CALPERS would need more skin in the game to make the big profits they made on the rise of oil prices. The fact they made such profits was brought out by the congressional hearings when congressional leaders ascribed the run up in oil prices to speculators whom I'm sure they believed were greedy republicans. I agree that speculators were responsible for a good chunckn of the run-up in prices and should not be allowed to buy commodities at 5 cents on the dollar. Notice the investigstion was dropped like a hot patato when the congress was warned by a large member of the majority constituency of the uintended consequences of regulation.
    Reply | Link to Comment
  •  
    Nov 21 02:38 PM
    I meant 30m each way, 60 miles round trip.
    Reply | Link to Comment
  •  
    Nov 21 03:05 PM
    Typical Mark Perry. Ignore the fact that your graph has shown a very recent new record in hour-to-work-for-a-gal... and then it plummets. First, that rise was the opposite of the "savings" that we are experiencing now, and it took place over a longer period of time. So we need gas prices+wages to remain such that the backside of the peak will integrate to the same value as the rise from 2002 to the peak, or roughly 3 more years of the current price. Will that happen? You also assume that the trends in traffic volume will hold or continue to decrease. That may be unlikely given that the current gas price signal says 'Drive, Drive, Drive.'

    You can't ignore the rise and make it like the fall has magically and immediately saved the country all this money.
    Reply | Link to Comment
  •  
    Nov 22 01:05 PM
    if we in the USA took that 315 Billion dollar savings and applied it to the DEBT of 12 Trillion ---we could pay the Government debt in off in only

    26 years.
    Reply | Link to Comment
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