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Thursday, June 19, 2008

Who Cares About Rising Gas Prices?

I did a rough calculation recently. If you add up all the costs of owning a car, gasoline is a tiny fraction of the price!

What are all the costs of owning a car?

The biggest costs are depreciation and repairs. A new car costs around $20k. A new car loses a substantial percentage of value its each year. You don't need to buy a new car every year. Suppose you can buy a car and keep it for 10 years. That means you pay $2k/year in depreciation of the price of your car. For a new car, you won't pay much in repairs, but depreciation occurs at a faster rate. For an older car, the depreciation is less, but the cost of repairs is higher. Let's use a total of $4k per year for depreciation and repairs.

There's also car insurance, which government violence demands you buy. There's also the license and registration. Let's use a value of $1k for this.

This brings our "fixed costs" total to $5k. You pay $5k/year for owning a car, independent of the amount you drive it. If you don't drive your car much, you pay less in repairs but more in depreciation. If you drive your car a lot, you pay more in repairs.

How many miles do you drive each year? Let's estimate 10,000. Suppose you get 20 miles per gallon of gasoline. You bought 500 gallons of gasoline. At $4/gallon, you spend $2000/year on gasoline.

These values are rough estimates. Even if you tweak the numbers a little, it's obvious that gasoline is a relatively small fraction of the cost of owning a car.

As the cost of gasoline rises, the cost of the car itself and repairs will also rise. The biggest component of rising gasoline prices is money supply inflation. The effect of increasing demand or decreasing supply is negligible compared to the effect of inflation.

The reason rising gas prices are "painful" is they're an obvious reminder of inflation. People may not notice when the price of a loaf of bread increases from $3 to $3.25. Gas prices tend to rise in lockstep with inflation. People don't pay attention to the price of minor purchases, but they *DO* remember the price of gasoline.

1 comment:

Monkt said...

Marc Stevens actually did an interesting video on this a few weeks ago.

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