The End of an Era

With the exception of a seven-year period beginning in 1979, the inflation-adjusted price of a gallon of gas was never higher than $1.60 from 1950 to 2003. As recently as 1998, a gallon of gas cost $1.10, the lowest inflation adjusted price recorded at least since World War II, perhaps ever. In 2004, gas went to $1.94 a gallon, then to $2.34, $2.65, and $2.79, in successive years. This year’s average price will certainly end over $3.00, marking a near doubling in five years and a nearly 300% increase in ten years.

With gas prices averaging a bit less than $1.50 during most of the “automobile era,” a family of four consuming 2,000 gallons of gas would spend $3,000 a year. This means that for much of the automobile era, gas prices have pretty much represented a fixed cost of approximately 7% of average family income. Consumers could happily motor certain in the knowledge that the cost of gas would be mostly incidental to the cost of driving and the cost of living.

Under these circumstances, people made certain decisions – such as the type of car to drive, how far to live from work, where and how often to go shopping, how many cars to own, and whether or not to use public transportation – based on certain expectations about the cost of gas, expectations that have been reasonable throughout much of the automobile era.

Likewise for businesses. The proximity of businesses to employees and customers and to public transportation lines is shaped by fuel costs. So are decisions about how and how far to ship goods. So, I would submit, are decisions about the scale or size of the business.

And these are just direct, at the pump fuel costs. Since energy is involved in almost everything we do, increased energy costs are a major source of inflation, showing up in increased shipping, heating, and cooling costs. In our petrochemical economy, oil also represents a major input in paints, plastics, food, and fertilizers.

My point is that our landscape of lawned suburbs, retail sprawl, and campus-like office complexes connected by a dense thicket of roads is the product of an era of cheap fuel, an era that has just ended. With oil production declining in Mexico, the North Sea, Russia, and Norway, with demand growing far faster than supply, and with even Saudi Arabia showing signs of fatigue, there is little evidence to support the hope that recent price increases are temporary.

In its last phase, fueled by well below average gas prices and well below average interest rates from the mid-1990s to 2003, we experienced a historic surge in residential and commercial sprawl. Retail square footage per capita more than doubled in what was already the world’s leader in retail space. Wal-Mart became the world’s largest company. Lowe’s quadrupled its number of stores. Now we are left with a huge hangover and a doozie of a recession to get over it.

Returning to our average family of four, fuel costs are now approximately $7,000 a year, or 16% of income. That’s equivalent to $585 a month, comparable to the mortgage on a modest home. This doesn’t include the inflationary effects of higher fuel prices on food, heating, cooling, and everything else. Using the methods used to measure inflation back in the 1970s, before the federal government changed the formula to show less inflation, today’s inflation rate is almost 12%. (See article here for details).

It will take a while for the new reality of gas prices to be felt. Many households and businesses will carry out plans made in a previous era, believing that era isn’t really over. Schemes to suspend gas taxes, send checks to taxpayers, and draw fuel from the Strategic Petroleum Reserve will be tried.

In the end, though, we will need to accommodate to an era of permanently higher fuel costs. Even as a dedicated opponent of sprawl, I enter this new era with real concern.

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3 responses to “The End of an Era

  1. Bill’s article on End of an Era is right on. I said for many years in my transportation career that there would not be significant changes in peoples driving habits until gas hit $5 per gallon. Maybe $4/gallon will get things started. The politicians never had the backbone to raise gas taxes a nickle or a dime so that transportation infrastructure could be adequately funded.

    Now they are trying to become local heroes by suspending the gas tax for a while. Many states are already losing ground on road and bridge conditions. Wait until the revenue drop hits them. All this will further help to end the era of the automobile.

    The hope now is that small communities like Geneseo can hang on to their small businesses so residents will have a place to shop instead of driving to the mall.

  2. Bill’s article is well written and makes some very good points. One point that seems implied is that development locally will cause people to not have to drive long distances to purchase goods, i.e. Lowe’s in Geneseo. I agree that small businesses are needed and hope that local retailers do not suffer when the Lowe’s opens. Small businesses are necessary to ensure competitive pricing and competitive service. While a big box may have an advantage in pricing, many people shop where they do because of service.

  3. I work at Mt. Morris Furniture, a local store approaching its 100th year. We have had customers from as far away as Ontario, Canada and the Thousand Islands. Daily we have clients from Greece, Penfield, Fairport, Pittsford, and Rochester to the North, West and East and from counties south of us that stretch all the way down to the Pennsylvania border.

    It is unclear what the impact of gas prices will be on our customers in these far flung communities. Locally, we have seen increased support for local businesses and they are vocal about it but will it be sufficient?

    The impact on the price of oil may ultimately accelerate the already tenuous good fortune of home improvement stores eager to land in growing communities such as Geneseo .
    The expansion of this town may be slowed if people who wanted to commute to Rochester or to other regional towns determine that high gas prices make Geneseo less desirable as the ideal bedroom community for them. This will, of course, impact the growth of all businesses in our area.

    It is a lovely dream that local hardware and lumber businesses and even furniture businesses who sell carpeting, lamps and other items found at Lowe’s will not suffer should it locate here. A feature article a year or two in BARRONS on Lowe’s disclosed that, since the home improvement industry is relatively flat, that the only way Lowe’s can make money now is to put smaller businesses out of business. It is corporate policy. I wish I could find that article again easily and at no cost but it does exist.

    The one thing that I do know for certain is that the future will bring even higher jumps in furniture prices. Think of the average upholstered chair. The wood for the frame is hauled from the forest to the mill. An oil fueled saw cuts it into a frame. The underlying polyester cushions and the upholstery fabric (generally made from oil based fibers) are increasing in price at an unparalleled pace. These items are trucked from the factories to the manufacturer for assembly. Finally, the finished product is shipped to the retail store using, you guessed it, oil.

    The sticker shock to furniture customers has been great. People are daily made aware of the increase in the cost of food due to rise in the cost of oil. But they are not daily in a furniture store. When they do come in, staff has to spend a lot of time bringing them up to date on why the $200 chair is now $400. Last year alone, many vendors put as many as 3 price increases into the pipeline.

    Working through price increases will be a kind of educational experience for most people. The true cost of the oil increases will eventually be in our sights but it will take time.

    Vegetable gardens and a couple of chickens will not overly change our economic viability in the area of food costs. If you are the kind of would-be farmer I am, the harvest will not provide sufficient impact on food supply and cost.

    Books will be written on how to save on every item in our lives. This will be a relief from the countless tomes on how to survive at the office, how to write an effective resume and how to conduct a successful interview.

    As Bette Davis said in her seminal film ALL ABOUT EVE: “Fasten your seat belts. It going to be a bumpy ride.” It is already. However there will be a sector of the economy making money: psychologists and psychiatrists. They will have more of us at their doorsteps trying to find our way.

    And for those who want to invest in this change, pharmaceutical stocks will undoubtedly go up as they rush to fill orders for anti-depressants. I wouldn’t bet on a home improvement stock like Lowe’s now but pharma stocks look very good.

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