Monday, December 29, 2014

Getting Carried Away By Gas Prices

Right before Christmas the air was filled with reports of more people driving over the holidays due to lower gasoline prices.  The reported per-gallon decrease from a year ago was 89 cents in Connecticut, 59 cents in Indiana, 84 cents in South Carolina and 80 cents in Georgia.  Pictures from Detroit, New Jersey and Louisiana showed people thrilled to be pumping gas for such a reasonable price.

As a result of the lower prices, people were expected to be driving more.  One report told us that in Northern California, “lower gas prices are likely one reason travelers will be driving their own vehicles or rentals to their destination.”  An energy economist from Purdue University was quoted as saying, “Anyone thinking 'should I drive or should I fly' will probably lean toward driving…It's much cheaper to go reasonable distances by car."  With gas prices down the holiday trip would be a bargain.  But is it really so great?

Let’s consider this question by taking the highest estimated savings (89 cents) and round it up to 90 cents per gallon.  (The actual national average is about 65 cents.)  Different people define the idea of driving a reasonable distance differently, but 500 miles is about a full day of driving.  Anything much farther would be considered by most to be a very long drive.  If a vehicle gets 25 miles per gallon on the highway, and many can do much better than that, the savings would be 90 cents (one gallon)  for 25 miles, $9 for 250 miles and $18 for 500 miles.  That’s not really a lot of money, just about enough to buy a family of four a very inexpensive lunch during those 10 or more hours on the road.  But for the prospect of saving less than $20 for a road trip, drivers are making some very impulsive decisions.

Is it cheaper than flying?  Driving a reasonable distance, up to about 500 miles was cheaper than flying last year and will be cheaper than flying again this year.  The decision to fly these short distances usually depends on the need to get there quickly or that someone else, like the company, is paying for it.  The lone exception might be if you have someone to drop you off at your home airport and pick you up at the destination, and you can get one of those rare, very cheap fares.  Otherwise, drive, but not because of gas prices - it's because of airline prices with their other associated costs and inconveniences.

The sad thing is that some people turn a little savings on one item into a lot of spending on another, whether it be extra travel, more Christmas gifts or something special for themselves.  By overestimating this small difference, we give ourselves permission to indulge in other areas.  The Christmas news reports of more decisions to drive also confirm what I predicted in November – that most people will spend the gasoline windfall instead of adding it to much-needed emergency savings.

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