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Thursday, August 09, 2007

One reason the price of gas doesn't bite as much as it might?

After the initial squawking about the volatility and level of gasoline prices, things seemed (at least to me) to have calmed down a little. Perhaps we have adjusted our behavior to accommodate the increased cost of gasoline.

One other explanation is that the price of gasoline is only one component of the overall cost of transportation. The price of tires, oil changes, and ultimately the car you drive, also factor into the total cost of transportation. People might get excited about an increase in the price of gasoline while they are driving an expensive SUV precisely because when they purchased the expensive SUV the price of gasoline was lower. The price change in gas isn't immediately offset with a reduction in the price of the car and thus the overall cost of driving increases.

Over time, however, people might be able to adjust their transportation bundle so that the level and volatility of gasoline prices do not have the same impact on the overall cost of transportation as they might have in the past.

Comerica Bank's first quarter automobile affordability index has been released and the trend over the past ten years or so is that it takes fewer weeks of work for the average household to purchase a new car.

I suspect the trend line on a gallon of gasoline is likewise downward sloping. Thus, while the nominal price of gasoline and automobiles might be increasing, the real price of both is decreasing. If true, then the griping over increased gasoline prices would naturally be lower over time.

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