It's Rishi

The price of oil is creeping up fast. Right now as I write this post, oil has just risen above $93, a 50% increase over the average price of oil in 2006 (about $60 according to this data). While the current crude oil prices are in absolute dollar figures a record high, on an inflation-adjusted basis, we are not quite at the all-time record level of ~$98 set in 1980; source).

Without getting into the details of why oil prices are rising and if the trend will continue, let’s discuss a certain key question. A co-worker of mine recently asked me if I had changed my driving habits as a result of the increased gas prices in the past year. That was an easy answer for me: “No”. Then he asked the more interesting question: “At what price will you change? $4? $5? $10?”. $10 gas may sound ludicrous, but it’s really not that farfetched. After all, gas prices in most of Europe is at least twice what it is here. In fact, gas is approaching $9/gallon in the UK! (source)

So, what is my magic number? It’s hard to throw out a number but I do know that it’s a high number. My weekly routine does generally involve a fair amount of driving, and there’s few to zero suitable public transportation solutions. Let’s say I drive 1k miles per month and my car averages 25mpg. That’s 40 gallons a month. At current gas prices that’s about $150. At $10/gallon, that’s $400. Annualized, that’s $5,000, or about $8,000 on a pre income tax basis! If gas prices went extremely high, I would undoubtedly need to change my living requirements. Specifically the route from home to the office would either need to involve a short drive or primarily public transport. My driving habits and the fuel economy of my car are very average. With that in mind, let’s remember that the US median household income is not much more than $40,000. About 15% of your post-tax income dedicated just to gas is an impossibly high expense.

The truly scary aspect of rising oil prices is its compounded effect on the cost of living. It’s no secret that higher oil prices correlates with inflation. Not only does high gas prices increase the wallet burden at the gas pump, it also affects the price of many common consumer items because the costs associated with transporting those items rises.

It is often said that Americans view cheap oil as a God-given right. Whether that’s true or not (I tend to agree that it is true), we may soon find that right revoked for good. And at the current rate, it may happen a lot sooner than anyone had predicted. How that affects the landscape of this nation in the decades to come will be absolutely fascinating to watch.