Michael Gorman: Stop driving farther for gas bargains. There is no such thing
By driving greater distances in search of cheap gas, consumers are consuming more of the product that has just increased in price. This defies the law of demand.
Now that gas is $5 per gallon, do you drive around longer looking to save on the price per gallon?
I was listening to a radio show in which callers were offering their rules of thumb, such as: “If I can save at least 15 cents, it is worth it. Gas is too expensive!”
In a similar vein, nightly news reports are providing the locations with the “cheapest gas,” essentially encouraging bargain hunting among gas purchasers. People are being hit hard by the rise of prices, and it’s understandable to look for ways to cut expenses. But driving farther to save on gas prices is irrational.
Don’t do it.
I am not a shill for the gas companies, encouraging wanton spending and willingness to accept high gas prices. I like to think about problems in a rational cost-benefit way.
A typical driver drives 13,500 miles per year. If you also average an ideal of 25 miles per gallon, that’s 540 gallons. At $5 per gallon, that’s $2,700. Though it’s a big number, it pales in comparison to other household expenses such as rent or a mortgage. The increase of $1 means $540 more per year, or $45 per month.
However, thanks to generally more fuel-efficient cars, gas mileage has risen appreciably, on average reducing the total percentage of the household budget allocated to gasoline. Cars now simply go farther per gallon, so the relevant measure is miles per dollar.
When you consider the “real” (or inflation-adjusted) miles per dollar, the cost of getting from here to there is really quite low. For example, gas prices have risen from about $1 to $5 since 1980. But, because other prices have risen as well, the “real” cost of gas has roughly doubled after adjusting for inflation.
Viewed another way, the minimum wage has nearly tripled since then, so though gas is more expensive, it is nowhere near five times as much. Meanwhile, the fuel efficiency of passenger cars has nearly doubled from a little more than 18 mpg in 1978 to more than 25 mpg. So though gas is twice as expensive, we get roughly twice as far on each gallon.
The rate of price increases is really irrelevant to the conversation. We focus on what was, or what could be, rather than simply making decisions based on what is. Yes, the price of gas “feels high.” No one likes it. But why doesn’t bargain hunting for gas make good economic sense? By driving greater distances in search of cheap gas, consumers are consuming more of the product that has just increased in price. This defies the law of demand. When the price of something goes up, consumption of it should go down, other things being constant. It is that simple. In this case, when the price of gas goes up, if people drive out of their way to save a dime per gallon, they are consuming more gas as its price rises. They might save a dime, but they end up burning more gas in the process.
Because gas is a commodity, generally considered to be the same by most consumers no matter the seller, prices are highly competitive and rarely show much local variance. Gas stations across the street and down the street rarely vary by more than a few pennies, if at all. So, the consumer usually has to drive a reasonable distance to save a reasonable amount of money. But, more importantly, the 10 or 15 cents is about a 2% to 3% discount ($0.10 or $0.15 on a $5 gallon of gas). As gas prices go up, the 10 cents savings is a lot less, on a percentage basis, than when gas was much cheaper.
Say you have to drive 10 miles round trip to the “best” gas station in town to save 15 cents per gallon. You burn about one-third of a gallon representing about $1.66. You have to buy nine or 10 gallons to break even without even considering the value of your time wasted in the 20 minutes you spent to drive there or the depreciation on your car. Or the uncertainty of actually getting the deal you hoped for. If you have a large tank (say 30 gallons), you earn a net savings of about $5 on a $150 purchase, before considering the value of your time.
Given the certain cost, and the uncertain benefit — why waste your time? The drive for gas bargains just isn’t worth it. Drive less, join a carpool, combine your errands or ride a bike — but don’t go in search of gas bargains.
Michael Gorman is Niehaus chair in business analytics and operations management at the University of Dayton in Ohio.
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