Responding to Four-dollar Gas ~ Thinking Like an Economist

What am I personally going to do about four-dollar a gallon gas? I’ve been thinking about buying a motorcycle. Whoa… Hold on. Let me explain.

I was 64 on my last birthday, and my wife tells me that I’ve become more pessimistic with each added year since she married me. Perhaps she’s right; I certainly don’t antici- pate the price of gasoline to come down by much anytime soon. But is this pessimism or am I just thinking like an economist?

 We’ve all heard the most commonly accepted reasons for the recent rise in the price of gasoline: growing world-wide demand for crude and the declining value of the dollar.  But have you heard this one: price speculation driven by fear of an imminent dis- ruption of thirty percent the world’s supply of oil caused by an expansion of the conflict in the Persian Gulf region? Even with China and India subsidizing the cost of gasoline for their citizens, world demand is currently being met. So the laws of supply and demand alone do not fully explain the rapid rise in cost.

 The Strait of Hormuz is a 21 mile-wide choke point through which nearly a third of the world’s total supply oil must pass to get to world markets. Having just completed a two-day economic summit for educators at the Dallas Federal Reserve Bank, I’ve been left thinking about this quite a bit lately.

Osama Bin Laden has said, “Oil is the umbilical cord and lifeline of the crusader community.” Maybe al-Qaeda is winning this war and our current leadership doesn’t even recognize it.

History may recall that our decision to invade Iraq, however noble our rationale for this may have seemed at the time, was the biggest economic blunder of all time. Consider the following two charts. The first one shows the rising price of oil since 2003, the year that we invaded Iraq. But on closer inspection, one can see the rapid increase really started soon after our 2001 invasion of Afghanistan.  The second chart shows the dollar’s decline against a broad basket of currencies over the same period. 

Interesting, hugh? 

Surely the war is not the only thing causing our economic woes, but the correlation of these two trends, the rising price of oil and the declining value of our dollar, to 911 and our declaration of war on terror cannot be just a coincidence. HELLO!?!?

So, what am I personally going to do about this? Well, for one thing, I’m certainly not going to vote in the upcoming national election for the same kind of thinking that got us into this mess.  Aside from that… I’ve been thinking about buying a motorcycle.  Yes… this will save me money on gas and help the economy, especially if I buy a Harley Davidson, the only motorcycle that’s still made by Americans right here in America.

My wife and I will be getting an economic stimulus check soon. I didn’t think we would owing to the amount of money that we had to claim on our 2007 income tax, but the IRS only prorated our $1200 downward based on the amount over the maximum for a couple filing jointly. Woo – woo! Now, we could do the smart thing and pay-down some of our remaining consumer credit we still owe – we’ve been trying in recent years to eliminate as much of this liability as we can. But the government is borrowing money, adding something like another $100 billion to the national debt this year on top of the separate resolutions to pay for the war in an attempt to jump-start our stalled economic engine – consumption. So the least we can do is our patriotic duty, right?

Let’s see now… the bike I want is a 1200 Sportster XL with an extension package for my longer legs and a passenger extended seat, just in case my wife overcomes her dread and decides to ride with me someday. Not counting finance charges, sales tax, an increased premium to my existing auto insurance, an increased premium for a greater amount of accidental death insurance, and safety gear — can’t forget the safety gear — that’ll run me $11,000, give or take, for a new one.  If I ride a little more than half of the time and drive a little less than half of the time, let’s say 6300 miles annually on the motorcycle and 5700 miles in my car, and the motorcycle gets 80 mpg, I’ll be saving $758.17 a year in gas assuming the long-term average price stabilizes at $4.25.

Wow!  At that rate the motorcycle will have paid for itself after just 15 years.  Of course, I could get rid of my car and only travel on my new motorcycle, assuming that I could find someone who wants to buy my 2004 Magnum.  I already know that it’s worth thousands less now than what I owe on it.  If I could get rid of it without having to take too much of a loss, the payoff time would be greatly reduced, of course. But the risk of having an accident would be greatly increased and I’d be sacrificing a whole lot of flexibility.

How many seventy-nine year-olds do you know who still ride Harley Davidsons?  Anticipating that I will live long enough to see my purchase pay for itself, or even that it might last that long, would be pretty optimistic, don’t you think?  But, hell, let’s say that I am an optimist rather than the pessimist my wife thinks I am — MISSION ACCOMPLISHED!

Hmmmm… where have we heard that before?

I guess there are some drawbacks to thinking like an economist after all. We can’t always justify everything we want. Even when we can, there are always trade-offs to consider.

I wonder if John McCain can follow this logic; it’s called cost-benefit analysis. We already know that George Bush can’t.

I invite your comments pro or con to this posting.

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Published in: on June 12, 2008 at 10:14 am  Comments (6)  

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6 CommentsLeave a comment

  1. Cool Kent, I was thinking about buying an old VW diesel pickup (50mpg) and making bio diesel at home.
    That’s what I thought I might do with my stimulus check lol….ed

  2. Cool, Ed. That would be a smart move, assuming that you have a steady/adequate source of used vegetable oil. Lot’s of others are thinking the same way you are, so if you find a good source, offer to pay them something for it and get ’em to sign a contract.

    Of course, you know, that buying something used with your stimulus check won’t be helping the economy, not by the way that Gross Domestic Product (GDP) is calculated. But, what the hey! Nobody really expects the stimulus money to do much good anyway. I think it’s more of an election year ploy than anything else, sort of like McCain’s idea for a Federal gas tax holiday — 18 cents off per gallon for the summer and bankrupting the Federal Highway Trust Fund in the process. Great idea!

  3. Kent, where did you come up with that harebrain idea?
    Of course your age might be okay but think of the noise it will create in our little close knitted neighborhood! Of course it means that you are really thinking about the high cost of gasoline and how best you can break even with our high cost of living. Too bad our people in Washington, D. C. aren’t really thinking about the impact of the rising cost of petro and how it is impacting our daily lives and I am sure they get a gasoline allowance. Heck, I do not work but have had to cut down on my volunteering in order to keep my budget in check.

    Sorry I do not use vegetable oil or any other type of oil for cooking so I cannot contribute to your noble effort of making your own fuel. What’s the solution?
    Well I suggest we bank those stimulus checks, pare down our spending to practically net zero, carpool if possible, buy American products when we can find them, and maybe, just maybe, we will break even. Of course I have not received my stimulus check yet and I am thinking about charging the IRS a hefty interest rate for not receiving it as of to date. Think that will work?

  4. Nancy, Nancy, Nancy… surely you recognize hyperbole when you encounter it.

    This posting isn’t so much about the high cost of gasoline as it is about what’s really behind our economic woes. No, I’m not really going to buy a high-dollar motorcycle. But I might just buy a low-dollar motor scooter, one made in China. After all, don’t we all look out for number-one first?

    No, no, no… I am not scheming to cook my own diesel fuel out of leftover vegetable oil. Motorcycles and motor scooters don’t run on diesel, neither does my car. That’s my kooky younger brother’s thinking out in California. He’s just practical enough to make it pay.

  5. Kent,

    Thank you, thank you, thank you! Pointing out the down right silliness (funny if it weren’t so tragic) of the Bush administration’s “stimulus package” by giving examples of what it means to think like an economist; a great way to illustrate how Bush, et al, think they can continue to fool the American people. The curtain on this dog and pony show can’t come down fast enough for my liking. Keep up the good work…onward through the fog!

    Gordon

  6. Or you could buy a Vespa…okay so it is Italian, but depending on the model you can get between 90 to 120 miles to the gallon and they cost between $3500 to $6000….Maybe your wife would feel better about a Vespa…think Audrey Hepburn and Gregory Peck in Roman Holiday!

    Take care,

    Carol


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