Wednesday, February 6, 2008

Impact of Rising Gas Prices

We are now seeing a sustained period of gas prices of over $1 per litre. I wonder how much of an impact this is having on consumption in the Canada? I wonder what the impact is in the US?

It is hard to tell if people are driving less or just absorbing the costs. How big has the impact been?

A few years back we were paying about 50 cents per litre. An average car drives about 20 000 km in a year and gets about 10l/100km. This works out to a fuel cost of about $1000 per year for an average car in Canada. At $1.10 per litre, this has now risen to $2200.

$2200 is in the range of what we pay for fuel for the car. We spend much more on other things. Our annual food bill is about $10 000. We pay more for one month of our mortgage than all the gas for the car for a year. Gas for the car is not a big thing in our budget.

If you drive 10% less, you save about $220 - this means driving about 40 km less per week. But is it really worth doing? Does it make much difference? Would I even notice this money? This about the same amount of money as 2 Americanos at Starbucks a week or one beer a week out at a cheap bar.

The other way to save is to get better gas mileage - if one can improve by 10% the gas mileage on the car, this again saves about $220. This can be achieved by more frequent car care and driving with fuel economy in mind. From what I see out there very few people are doing this.

Another option is to buy a car that uses less fuel. If one can improve the mileage by 5l/100km, one saves about $1100 per year. Not a very big bonus to encourage buying a car that can get better mileage. Just over $20 per week.

As far as I can tell, the price of gas is still much too low to make any significant dent in driving habits. The marginal cost of owning a car will have to rise a lot more before large masses of people will choose to get out of their cars. Realistically we need to be looking at gas prices of more than $4 per litre before we will see the price make any change to driving habits. At this price, a 10% reduction in fuel costs would save $800 per year and a 5l/100km upgrade in vehicle would save you $4000 in a year. But even at $4 a litre, my gas expenses would still be smaller than what I spend on food.

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