## Thursday, October 16, 2008

### Falling Gas Prices Over The Last Month Will Save Consumers \$156 to \$188 Billion Annually

According to the most recent data from the Federal Highway Administration, the total traffic volume over the most recent 12-month period (through July 2008) was 2.944 trillion miles. According to data from the EIA, the average fuel efficiency for all vehicles in 2006 (most recent year reported) was 17.2 miles per gallon. That means that the amount of gasoline required for the traffic volume over the most recent 12-month period was 171,216,860,465 gallons (2.944 trillion miles driven divided by 17.2 miles per gallon).

Therefore, every penny decrease in the price of a gallon of gas would equal more than \$1.71 billion in consumer savings over a year (171.216 billions of gallons X \$0.01). In that case, the \$1.10 per gallon decrease in gas prices from \$4.12 in July to \$3.02 today (see chart above, data here), would represent annual consumer savings of \$188 billion from the fall in gas prices just so far over the last three months (compared to a scenario where gas stayed at \$4.12 per gallon).

An alternative calculation is to use the EIA estimate of 390 million gallons consumed per day in the U.S. times 365 days per year, or 142,350,000,000 gallons annually. For each penny decrease in the price of gasoline, consumers would save \$1.4235 billion annually according to this approach, and will save \$156.6 billion over the next year from the \$1.10 per gallon decrease in gas prices since July.

If gas prices continue to fall over the next month (which seems likely), it could be like a \$200-\$300 billion tax cut for the economy.

Bottom Line: For every one penny decrease in gas prices, consumers save between \$1.42 billion and \$1.71 billion annually.

At 10/16/2008 9:21 PM,  Nobrainer said...

Mark,

is it really a good idea to calculate savings compared to a worst case scenario?

It's ridiculous when Congress or the President (or both) proposes an insanely large budget, passes one that is slightly smaller, and then brags about all the money they saved the taxpayer.

Your analysis here, is on a similar plain.

At 10/16/2008 9:29 PM,  nobrainer said...

[or plane]

At 10/17/2008 5:38 AM,  juandos said...

"It's ridiculous when Congress or the President (or both) proposes an insanely large budget, passes one that is slightly smaller, and then brags about all the money they saved the taxpayer"...

Hmmm, interesting point...

Valid point for those who've been paying attention to the machinations of the people we elect to the Oval Office and the Congress...

Considering what the price of gasoline is now and what it could be in the free market that is unfettered by a political agenda (which just drives cost upwards, something that's been known for quite some time) are we going to see market fundamentals finally take lead in determing the real price of gasoline and other products derived from crude?

Will we ever learn what Thomas Sowell tries to teaches us that continued intervention by politicos will continue to drive the price of energy beyond what normal market forces do?

At 10/17/2008 8:05 AM,  Anonymous said...

The logical argument on from this is why the US doesn't have more fuel efficient cars - it doesn't take a rocket scientist to take the 17.2 mpg figure and make it 25mpg and see what that does to the numbers. Or how about diesel cars that can do 50mpg.........

Why not wean off the overweight, big, thirsty cars?

At 10/17/2008 9:15 AM,  qt said...

The problem with more fuel efficient cars is increased deaths. People buy the vehicle because it is inherently safer than a lighter car.

Agree with you that diesel is definitely more fuel efficient than gasoline. Diesel hybrid offers 70 mpg.

Juandos,

The market has been discredited (pun intended) by the recent financial crisis by the Washington elite that brought you zero down mortgages and turned a blind eye to 67:1 leverage at Freddie Mac.

An Obama presidency promises to be a singularly self-righteous, holier-than-thou experience. Have to love the way Senator Obama makes it up as he goes along.

At 10/17/2008 9:17 AM,  Anonymous said...

http://www.smartmoney.com/investing/stocks/government-intervention-problematic-despite-rally/

SmartMoney has stupid opinions.

"The collapse has come even amid historic measures taken by the federal government to attempt to restore investor confidence. Yet as I've repeatedly pointed out, the more the government has done to "fix" the problem, the more erratic and volatile the markets have become. By the end of last week, as the Dow experienced its first 1,000-point intraday swing, it finally became painfully clear to even the financial novice that the markets had become unhinged."

********************************

I wonder how many points the "free market" would have dropped if the U.S. and other governments had not intervened?

While nobody is going to jump for joy that the government has to bail out the wondeful and perfect "free-market", it is more than obvious that the "free-market" theories has some huge flaws which can collapse global economies.

Should the governments just sit idly by while we see an economic depression to remind us of what our parents lived through?

At 10/17/2008 10:51 AM,  qt said...

Anon.

Agree with you that the government must step in and agree that the FED and Treasury are doing a credible job.

While investment banks clearly were over leveraged - some as high as 30:1, we can't ignore the non-market forces involved:

1. monetary policy lowering interest rates to a 40 year low and keeping rates low for an extended period of time

2. a bi-partisan effort to make housing more accessible to low income Americans by waiving downpayment requirements, minimum income levels, leverage thresholds;

Speaking of blame, another scheduled witness is Eugene Ludwig, who was Bill Clinton's Comptroller of the Currency in the 1990s. In 2000, Haverford College's magazine reported that "Ludwig remains proudest . . . of his efforts to compel bank compliance with fair-lending laws and his revitalization of the Community Reinvestment Act (CRA), a 1977 law requiring banks to invest in poorer neighborhoods and improve lending and service to low- and moderate-income borrowers. Although branded an 'activist' for his vigorous support of the act . . . he points to the cold, hard facts to justify his tactics. After just one Justice Department referral in the OCC's previous 129 years, Ludwig's tenure witnessed 27 fair-lending cases, resulting in tens of millions of dollars in fines against violators."

3. Zero default on mortgages in the majority of states making it easy for people to walk on their mortgage;

4. Dominance of Fannie & Freddie in the mortgage industry who were buying up mortgages left, right & centre; Freddie getting to 67:1 leverage

5. Changes to the international banking rules that exempted mortgages bundled as securities from capital requirements that applied to mortgages held as loans

The problems are not completely the market nor completely the result of shortsighted government policy nor completely the result of individuals making poor choices. To ascribe blame to just markets, however, is what is being done. While this taps into public anger, it does little to inform, alleviate the present liquidity crisis or prevent future crises.

The heavy lifting is not being done on this problem by Chris Dodd, Nancy Pelosi or Barrack Obama but by Bernanke, Paulson and their staff working 18 hrs a day, 7 days a week. This is a very serious, complex problem and fortunately, we have some very bright people looking for solutions rather than grandstanding.

At 10/17/2008 12:59 PM,  juandos said...

"Why not wean off the overweight, big, thirsty cars?"...

For a socialist like anon this is only a rhetorical question but, "why can't the FEDERAL government wean itself off of our earnings?"

"Have to love the way Senator Obama makes it up as he goes along"...

Being a liberal its MANDATORY for Obama to lie since the facts rarely conform to the liberal narrative...

"Should the governments just sit idly by while we see an economic depression to remind us of what our parents lived through?"...

Well instead of our federal government making up money out of thin air maybe reducing the big bite of Corporate Income Tax Rates, that would help quickly...

Maybe if the federal government didn't punish people excessivly for being successful there could be more jobs...

BTW if credit is so hard to come by then how could American Airlines afford to buy 42 new aircraft?

I work for them and I know they don't have that kind of cash on hand...

At 10/17/2008 1:44 PM,  qt said...

Juandos,

Thanks for the link indicating Obama's penchant for self-invention.

Have run across confabulators before who seem to go from one mentor/champion to another without any deep, lasting relationships. It is as though they try to fashion themselves into whatever incarnation will garner admiration, respect or love.

You are getting Pierre Elliott Trudeau, the master illusionist.

At 10/17/2008 3:10 PM,  the taxman said...

Juandos bables....
Well instead of our federal government making up money out of thin air maybe reducing the big bite of Corporate Income Tax Rates, that would help quickly...

*********************

"Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress.

(Getty Images )The study by the Government Accountability Office, expected to be released Tuesday, said about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period"

At 10/17/2008 4:36 PM,  Anonymous said...

We should have a very large tax on cars with 8cylinders and above or cars at 4.0L and above. These cars have lower mpgs. I suggest a 8,000\$ tax.

The other place to lower consumption is with tractor-trailers. Not sure what MPG they get.

At 10/17/2008 8:21 PM,  Dantes said...

In other words, BIG OIL gave us a huge tax cut, right? And that would even include some SPECULATORS!

At 10/18/2008 3:18 AM,  H.A. Black said...

I noticed that Larry Kudlow cited your blog in his latest piece. He is correct but I hope it is not at the price of high rates of inflation. By the way, your blog has inspired me to start one (haroldblack.blogspot.com). I am just a neophyte now but aspire to be half as informative as you. HB

At 10/18/2008 9:34 AM,  qt said...

taxman(?),

Try reading the fine print on the GAO report. The corporations that are not paying tax had no revenue or had no net income (revenue - expenses = net income (the bit you pay tax on)).

Does GM pay taxes on its losses?

If you cite a report, it helps to at least read it! :-\

We should have a very large tax on cars with 8cylinders and above or cars at 4.0L and above.

We do...it's called the gas tax and private companies volunteer to collect it for the government. Hard to find any other tax with admin costs or rate of compliance to equal it.

At 10/18/2008 9:51 AM,  Anonymous said...

Looks like Juandos and Q.T are blinded by their love corporation ideology we have so many holes in our tax laws a corporation which is making "NO Revenue" continues operating year after year.

Last time I checked a company which made NO revenues would not be operating year after year.

These are the same clowns which would have us believe the trickle down theory of the last 8 yeras has really been working.

At 10/18/2008 5:46 PM,  qt said...

Anon.,

Instead of actually reading the report, you prefer to try to label your opponent rather than rebut his/her positions. It's called ad hominem in argumentation (in latin, this phrase means "attack the man").

Personal attacks completely undermine the credibility of your position. Wise move posting as an anonymous if you lack the ability to deconstruct the argument, and rebut its claims/evidence.

A corporation is merely an ownership structure which allows a company to raise capital through the issuance of shares, limits personal exposure to company liabilities (ie. the bank doesn't take your house if the business goes broke or if the business is sued by a customer who slips in the parking lot), and allows the owner to use retained earnings to tide the business over in bad years. One cannot love or hate an ownership structure any more than one can love or hate a 3-hole punch, or a duotang.

If you actually read the report, what you find is that many of these corporations are small businesses. The proceeds are taken as salary by the owner who pays....wait for it....TAXES on the income. Just like the ABC link says:

"Half of all business income in the United States now ends up going through the individual tax code," Edwards said.

So, there's 50% of the 66%. The other 16% are companies who had business losses or companies who did not generate revenue.

Many small business also use holding companies. The shares of the business are owned by a holding company which is in turn owned by the shareholders. Dividends from retained earnings (ie. the accumulated net earnings that have already been subject to tax) are issued to the holding company and either invested by the holding company or the holding company can opt to issue a dividend to the owner(s) who pays a dividend tax. If you look at the stock market over the last year, is it any wonder that holding companies periodically issue nil returns???

The last 8 years reference is another ad hominem red herring. You tell me that my opinion means squat because in essence, I am a corporation loving, Bushite and somehow, I am supposed to conclude that you, by contrast, are an intelligent, erudite, insightful, lateral thinking debater. Really :)

The goal of argumentation is to persuade the listener through the presentation of claims and evidence. What you present instead indicates:

1. a clear anti-corporate bias
2. scant knowledge of business accounting, corporate ownership structure or taxation
3. lack of any informed analysis of the report in question

In short, your argument is so far from persuasive it's pathetic.