ROTFLMAO…

he thinks consumers “systematically exaggerate the importance of gas prices to their budgets.”

I had precious little respect for Levitt to start with, and with this single statement every suspicion I’ve ever had about him is validated.

Just… read that quote over and over again, and each time it sounds more moronic than the time before.

I drive a small pickup truck that gets 21 miles to the gallon typically and has a 15 gallon tank. I drive 15 minutes each way to work, and downtown three nights a week. That’s it. That’s all.

My gasoline bill last month was 281 dollars. To argue that the rising cost of the gouging going on at the pump is insignificant only shows hows completely void of credibility Levitt really is.

“exaggerate the importance” of gas prices to my budget?

Laugh? I thought I’d die.

Mac
http://www.brownsludge.com

I agree with Leavitt that many people (especially wealthier ones who are less price conscious) overestimate the cost of gasoline in relation to the total cost of owning a vehicle.

In the case of the PT Cruiser example here, it would be using 1,000 gallons per year which, at $3.61 per gallon, would total $3,610 per year. But assuming that the car costs $25,000 and is kept for 5 years and sold for $5,000, then the annual cost of ownership is $4,000 for depreciation; $1,250 in opportunity cost of capital at a 5% after-tax rate of return; probably around $1,000 for insurance; and another thousand dollars or so for taxes, tire replacement, and maintenance. Altogether, that’s still about twice the cost of gasoline at $3.61 per gallon.

But the gas card has a present value much greater than $967. The most likely scenario for the price of gasoline (based on the futures market for it) is that its price will stay essentially the same for the next few years except for seasonal variations. Thus, the owner of a PT Cruiser using 1,000 gallons per year and saving $0.62 per gallon with the card would save $620 per year. The present value of that at a 5% discount rate is $1,770.

People who think that the price of gasoline will fall substantially should sell futures contracts on it. That will cause the price of the contracts to drop to a point where I will buy them and use my profits (when the future price of gasoline stays high) to pay for my own rising energy costs.

Quibble from nerd, I did not (and do not) advocate a maxim of using just today’s prices to forecast tomorrows. In my mentioned blog post, I simply used today’s price to demonstrate the point, which is that people will pay up to the discounted expected savings of the gas card in the sticker price.

Tedd44,

While I generally agree with you, you analysis misses one point - The Chrystler offer is limited to 12,000 miles per yer, not the 21,000 in the hypothetical. Thus, your present value is overstated. If you rerun your numbers using 12,000 per year, you will ikely come to a present value very near Levitt’s. The difference will be the result of your choice of a different discount rate.

Aint’ economics fun!!!

Gimmick, thanks for the correction. Mr. Ross correctly used the 12,000-mile estimate in his calculation, and the 21,000-mile figure was the result of poor typing skills. I have corrected it in the original post.

If the hypothetical PT Cruiser is driven 12,000 miles per year with gasoline at $3.61 per gallon and 21 miles per gallon, then the annual gasoline cost would be about $2,100. I agree that the present value of this is around $1,000. This is less than 1/4 of the total cost of owning the vehicle that I estimated in my previous post.

It should hardly be surprising that most people don’t appreciate this, given their economic illiteracy coupled with the frequency with which they pay for gasoline. And the people selling cars (and, especially, SUV’s) are certainly not going to advertise that the depreciation of the vehicle and the opportunity cost of the money “invested” in it are the big cost items. Instead, consumers are urged to take on debt to purchase the biggest, most luxurious gas hog that they cannot afford.