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Driving is Costing You Dolla Dolla Bills!

And it might be a sign of things to come. Some of that is a good thing. 

Filling your gas tank with liquid hydrocarbons right now makes you think you are hallucinating once you get your receipt. If you are a  suburbanite who “invested” in huge, heavy, fuel-inefficient and spacious SUVs to bring little Timmy to daycare and then commute to work for an hour, each trip to the pump makes you want to pass out. Filling your 2021 Chevy Tahoe in the Bay Area is gonna cost you somewhere north of $170. And that will last you about 400 miles. 

tahoe

So assume that you see the error of your ways and are ready to trade in your ‘burbanite monster truck for a plug-in hybrid or a full electric car. You roll up to your local dealer’s empty lot and ogle the one car for sale. You look at the price breakdown and note that the Ford Mach-E you thought you were gonna get is listed with a markup of $10,000 above MSRP. Is Max making up stuff? No. Take a gander at what dealers are charging from this cool new crowdsourced site

markup

So you roll home, while drowning your sorrows in a bucket of heavily subsidized McNuggets you got from a drive through your car barely fits through and are sitting around the dinner table with your friends and family. While drinking your organic spiked Kombucha, you are having heated and angry discussions about “the system” and how it is stacked against you. Well, you’re probably not wrong, but over here we call it basic economics taught to lil’ Timmy in his first few months at college.

Let’s say you’re a dealer selling Fords. You are selling cars with four wheels like your competitors, but they’re slightly different from a Toyota. I mean, they are Fords! The beauty, unlike for undifferentiated things like corn, is that you can charge whatever you want for them, so you need to figure out what price will maximize your profits. Now let’s assume for a second that consumers really want more fuel efficient cars because gas is more expensive than beer, or in econ speak, the demand curve shifts out. Many people are literally willing to pay much more for that Mach-E GT than in the before high gas price times! You could be the nice hippie dealer and just stick with the MSRP Ford suggests you charge and let the consumer walk home with what we call “extra surplus”, which is the difference between what the consumer is willing to pay and what they are charged, or you could take a piece of that surplus in the form of cold hard cash. That is what a markup is. Most car manufacturers do not own their dealers, so you see this markup noted explicitly on the sticker in the window. For Tesla, on the other hand, who sell directly to consumers, this simply means raising the MSRP and bypassing the need to print out a sticker making this obvious! Which is exactly what is happening!

“But Max, does that explain why oil refiners and gas station owners are charging so much for gasoline?” No. That is a little bit more complicated. Gas prices are high because the input to production (oil) which is traded in a global market has become really expensive. But…Timmy would also learn that producers of gasoline would very much like to restrict output and charge higher prices than what the market would produce if left alone. And while this is hard to prove, the part of the supply chain where this is most likely happening is in refining, where refiners can restrict how much refined product (e.g. gasoline) makes it to market. This is the case especially in California where we require special gas that can only be produced in a limited number of refineries. There is a delicate waltz between how much you want to restrict output and raise prices to maximize profits, but you’re gonna have to come to my lecture to learn the deets. 

“So thanks for boring me to tears Max, but I am still angry. Why are you giving me a basic economics lecture? I am already paying for Timmy’s tuition, and he is becoming just as annoying as you are!” Well, I think what we are seeing in gasoline retail prices may give us a taste of what is to come if we are serious about regulating carbon and other externalities such as air pollution, congestion and safety. A $100 carbon tax will raise gas prices by about $1/gallon. While politicians are not talking about a $1 a gallon carbon tax currently here, it is not unthinkable that the optimal gas tax is somewhere around $2-3 a gallon higher than it is now (which is about the increase in gas prices relative to the before times). And that is a good thing. Yes. You heard me right. High gas prices are a good thing if you care about mother earth and your grandchildren and understand basic economics. Also, a carbon/gas tax generates revenue for the government, which sends it back to you in some form. Oil company profits only benefit their shareholders and the owners of the resource, which is usually not really you. 

“But what about dealer markups?” I like these as much as you do. This is where we are currently getting the exact opposite of where we want to end up. There is a literature on so called feebates, where gas guzzling vehicle buyers pay a tax raising their prices, which is then rebated to consumers who buy fuel efficient vehicles. This makes guzzlers more expensive and fuel efficient cars cheaper. Right now, we are seeing the exact opposite. The big markups are on the gas sippers and EVs. 

So in response to high gas prices and big markups, each day brings another stupid policy proposal in this space. Cap gas prices. Boo. Put more ethanol in gasoline. Dumb. Send car owners checks to offset the price of gas. Dumb. (I would be OK with everyone getting a check with no restrictions on what you could spend it on). There are some voices in my head saying that maybe we should think about a policy that caps or eliminates dealer markups on EVs and their cousins. But that is highly problematic too! Why? First of all, this would do nothing to change the quantity sold, as all of these cars are flying off the lots already! It would only change who buys these cars (maybe people with less purchasing power and those that are clever at figuring out when new stock arrives – I mastered this in the early pandemic days with Clorox wipes deliveries at Costco!). But I think I have decided to not be worried about markups in the long run.  EV supply in the long-run should be more elastic than the Short Run. In human speak that means that high prices for EVs lead to producers wanting to sell more. So they will make more. This will bring down equilibrium price in the long run. I hope this happens by the time my next hippie mobile is out

Keep up with Energy Institute blog posts, research, and events on Twitter @energyathaas.

Suggested citation: Auffhammer, Maximilian. “Driving is Costing You Dolla Dolla Bills!”  Energy Institute Blog, UC Berkeley, May 23,  2022, https://energyathaas.wordpress.com/2022/05/23/driving-is-costing-you-dolla-dolla-bills/

 

Maximilian Auffhammer View All

Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.

9 thoughts on “Driving is Costing You Dolla Dolla Bills! Leave a comment

  1. As Vaclav Smil states in his book Energy Civilization and History (page 439] “the probability of adopting rational, moderation, and restraint in resource consumption in general and energy use in particular, and even more so the likelihood of persevering on such a course, is impossible to quantify.”

  2. “Send car owners checks to offset the price of gas. Dumb. (I would be OK with everyone getting a check with no restrictions on what you could spend it on).”

    Not sure what proposal you’re criticizing, especially since they article you link calls for a flat rebate check. The Governor’s proposal for $400 or $800 not tied to fuel use and left to be spent on whatever they want will have deminimus impact on gasoline consumption–morer than 95% will go to other expenditures. As for being “universal”, over 93% of households own or lease a car in the state. I’m willing to live a 7% leakage on a public policy initiative–that would be a remarkable achievement compared to just about any other one.

    Jim, slower speeds on freeways makes little difference so long as the engine is running well below it capability. I watch my fuel economy on long trips and the different between averaging 75 and 65 might be 3% (and that depends on which way the wind is blowing.) Newer cars are so aerodynamic now that wind resistance is much less of a factor than back in the old days of fuel economy measurements.

  3. Max and Jim–how do we get your excellent analysis and suggestions out to the general public? As the media chatter on inflation and gas prices is going now, 2022 will be a disaster for the Democrats–and the climate…

  4. Large SUVs are often the rudest vehicles. They obstruct your view. They hang over into your parking spot – like the person hogging armrests, and flowing into your seat-space on an airplane!!

    Agree – NO GAS DEBIT CARDS [or other rebates tied to gas] – the guvs position almost makes me want a vote for a Republican [not a chance]. That is like easy student loans driving up college costs.
    I could be convinced that gasoline IS a utility, and should be regulated same as electricity-gas-water etc.

    One can hit back at the MSRP-markups – go checking prices/ deals on your eBike or your eScooter. That should scare the dealers.

  5. I was curious about how the shortage of vehicles was impacting the used EV market, so I looked on the Tesla website for a 2015 Tesla Model S 90D similar to mine that I bought in 2019. After three years and 50,000 miles, it turns out I can now sell my car for $10,000 more than the $50,000 I paid for it. I supposed I expected my car to depreciate in value, rather than appreciate, especially given the wear and tear of the additional mileage. Strange times indeed!

  6. An important consideration in my mind is whether this is a short-term disruption, caused by supply chain issues, or a long-term dearth of new cars and new petroleum sources caused by fundamentals in the marketplace.

    I’m still assuming the former. That is, over the next year or three the auto manufacturers will have enough materials and labors to produce more cars, and prices will result a more competitive stance. And the war in Ukraine will end, and new petroleum supplies will evolve (and demand for petroleum subside) to bring gasoline prices down a bit as well.

    I’m holding out to buy a new minivan (mostly a recumbent trike transporter) until things settle down. Plus, some vehicles that I’m interested in (VW Buzz; Toyota ProAceE) are not yet available here yet. And the Chrysler Pacifica Hybrid, the only E-minivan now available, is under recall for battery issues with “no remedy identified” and owners advised to park them away from structures and avoid charging the battery. So my 2002 Honda Odyssey will carry us and our trikes for another year or three.

    It was a little shocking to pull a Honda Odyssey up to a pump last night (for the first time since February) and watch the dial pass the $100 mark. That was a bit startling to me — and indeed the folks who drive their F-150’s to construction sites 40 miles away daily are seeing that experience every week. The political consequences of that will be non-trivial. We cannot solve the housing crisis without construction workers, and they often commute long distances to job sites (unless they camp in their construction sites, which some are starting to do, but that means divided families, a different heavy price to pay).

    But, while I disagree with John Maynard Keynes, who said that “There is no point in planning for the long run, for in the long run we are all dead”, there are some important things we can do in the short run. The next year or three will be a mess. There are short-term remedies, and long-term solutions. I want to stay focused on the long-term solutions: more efficient buildings, more efficient transportation systems, more efficient appliances, and more efficient lifestyles.

    But, for the short-run, I’ll end with the five tips I first wrote up during the second oil embargo (1978), when I worked for the state Senate Transportation Committee. Gasoline prices had passed the unthinkable threshold of $1/gallon, and people were very anxious and very angry:

    1) If you have a choice, use the more fuel efficient vehicle: We have a 50 mpg hybrid and a 20 mpg minivan. Choosing the more efficient vehicle for longer trips can save you half of your fuel bill.

    2) Drive slower: Driving at 60 on the freeway (the speed limit where I live) can save you 10% of your fuel usage compared with driving at 68 (just below the speed you think will attract a speeding ticket.)

    3) Proper tire inflation: Underinflated tires can cost you 5% – 10% of your fuel usage. Overinflated tires result in faster tire wear. The correct tire inflation is probably on a sticker in the driver side door jamb of your car.

    4) Don’t be a jackrabbit: Starting from a stop uses a lot of power. Your goal should be to keep the engine from going faster than it will be going when you reach your intended speed – usually around 2,000 RPM.

    5) Drive Less: Combine your trips — If you need to drop someone off, pick someone up, or go to a medical appointment, combine your grocery shopping and other errands into a single trip. Vacation close to home. Let your kids walk to and from school.

    • Jim,

      We too have vehicles built in 2002. One of them hitched a ride on a car carrier to get across the county in December. The other 02 is our ranch truck, an 02 Chevy 3500 4X4 that we bought used in 04 from a retiring vet. Having lived in rural settings since the 80’s we learned to coexist with the wildlife and wildfires. Noted below are a few routines we implemented over the years to minimize energy use/costs when traveling-

      1) Before long trips check that the air filter(s) is clean and ensure the fresh air intake leading to the air filter is clear of stuff. Critters find air intakes acceptable homes it seems. Before our last cross country trip in the truck we had some critters “nest” material (looked like pink insulation!) removed from the cold air intake.

      2) Verify that the tire alignment(s) are in the green. Early tire ware and blow outs can be minimized if the tires are hitting the road as designed.

      3) Minimize the weight in the interior of the vehicle(s). Carrying 300 pounds of books and case studies you meant to donate to the local library in a trunk, or say in the back of a horse trailer, for 2400 miles will reduce ones energy efficiency a bit. At least we remembered to take the horse saddles and 50 pound Al saddle rack out of the tack room before we filled the room back up with boxes of essentials.

      3.1) Be sure to stay under the “tongue weight” limit of the trailer and the trucks hitch limit as going over the limit stresses the suspension(s), effects the smooth riding of everything and lowers energy efficiency as well.

      4) Driving through cities can be stressful at any time and the stop and go driving uses way more fuel than traveling at a steady 60 mph so we try to arrange fuel, food, rest, and rest room stops to arrive at choke points in cities at non commute times.

      5) Certain parts of the country have higher octane ratings than others. If your vehicle recommends using 91 octane fuel and high test is being sold with a 93 octane rating one can blend midgrade (89 octane) and high test 50/50 and get the recommended 91 octane and save give or take 25 cents a gallon.

      5.1) We have found that diesel fuel additives, used to improve efficiency of vehicles that use diesel fuel, can be purchased locally at about half the cost of what truck stops, or turnpike service stations charge.

  7. Speaking of markups/surcharges/premiums/graft payments the cost to rent a 26 ft box truck for a one way trip from Sacramento to Ohio is $7281.00! The cost going the other way is $2648.00.

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