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Gasonomics 101

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Projected to hit nearly $4 a gallon sometime this summer, rising gas prices are beginning to take a toll on the economy. But that doesn't even begin to address the deeper social and psychological consequences. George Hoffer, an economics professor who specializes in the transportation industry at Virginia Commonwealth University, offers a quick syllabus.



Lesson 1: Crude Psychology

"Motor fuel prices are so important to the psyche. The average American consumer, the person who drives a car and goes to work, there is nothing more that you are attuned to as far as prices than gasoline. We see the [roadside signs] twice a day and multiple times a day.

"Other things you hear about going up, but they don't affect you. I think the income effect in gasoline is magnified. It's the one thing that we see repeatedly during the day. With gas prices, there is a psychic income effect on the way up and on the way down. It's the same thing as having your pay cut and you begin to tighten up. And on the way down there is glee."



Lesson 2: Weights and Measures

"You know, for the last 60 years in America -- and it's really been 70 years — the fuel efficiency of [your] car had nothing to do with income. The price of gas was so low that fuel efficiency was a total non-factor. In Europe and Japan, right from the beginning, they always kept the masses off the road [with] very high fuel taxes."

Historically, spikes in gasoline would last no more than a couple of years, but it was never enough time to have a sustained impact on the industry or economy.

"We started this time in 2004-2005. This is the first time it has stuck. This time we're four years into it. This takes a little bit of time, [but] what people drive will be separated more by class, because fuel costs will be significant enough that you will make a decision based on it."

In other words, the size of your car may, some time in the not-too-distant future, connote social standing.



Lesson 3: Electrochemical Reactions

"The hybrid that we have now is only a transition car. It's both an electric car and a battery, and a gasoline car. The hybrids, which are coming out in two years, are the plug-in hybrids. Mercedes is going to come out with one in 2010. They use the same [lithium] battery that's in your laptop. Then they go 30 miles on your battery."

Engines in the plug-in generation cars will be more like the 5 HP Briggs & Stratton in your lawn mower.

"They will be cheaper because they only have one propulsion system, and you don't need as big a battery pack because you are always recharging. Mercedes and General Motors [the Chevy Volt] are actually the leaders on this."



Lesson 4: The Resilient Auto Business

(and Dying Trucks)

"Unlike real estate, the car business is not totally dead. Since 1999, every year we have sold in this country 16 million to 16.9 million cars. This year, they are running just a little less than 15.5 million. Unlike the housing business, the car business is not dead in the water. The auto manufacturers have been able to do two things over the last three years: [Maintain] a very large profit margin in trucks and SUVs. They have been able until this year to induce consumers to look beyond the gas price … by giving tremendous incentives. [As a result], trucks have held at over 50 percent of the U.S. market.

"What's happened now is the big truck is the weakest part of the U.S. market. It started happening over the last seven to nine months. The reason is construction is down. [The big trucks are] used as an actual work and personal vehicle. With that market slowing down, the pickup truck market has been hit two ways: Toyota coming out with an all new pickup truck from Texas, the Tundra. Toyota is reluctant to ever admit a defeat. Toyota said they were going to sell 200,000 units in the first year. The market weakened on them. They started throwing money at the new pickup truck to meet the [sales goal]."

As a result, Toyota helped artificially prop up a weakening pickup truck market.

"The big pickup truck market is weak, the truck-based SUV market is very weak, and … people are [now] doing what they did in the old days: move into the station wagon. GM and Ford don't even make minivans anymore. If you look at the new Chrysler minivan, it has gotten much shorter in length and height. They are now called crossover SUVs." S



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