Gasoline prices: A one answer response 4.27.2006

In Gasoline prices: A one-question self-quiz, The Skeptical Optimist asks:
Which of the following two mutually-exclusive choices is your top priority for energy to run your automobile:

A - Cheaper gasoline starting now, so you can drive at least 20% more miles on $30 worth of gasoline.
B – Eventual independence from foreign oil, so our kids and grandkids can be free of the baggage that goes with dependence on it.

Which is your top priority: A, or B?
Interesting because I was just talking to my father the other day about mass transit issues, and he pointed out that for the vast majority of the population, the principal determining factor in deciding how one goes from point 'A' to point 'B' is not cost-effectiveness or damage to the ecology or even difficulty, but time--that is, how long will it take to go from point A to point B.

Now cost may factor into making the decision if it is worth going from point A to point B. But generally transportation costs--even when the cost works into the tens of dollars or even hundreds of dollars per trip--is not a primary deciding factor.

Time is.

And this is true if you are talking about a person driving to work, a family going on a road trip or flying to Disneyland, or a company shipping manufactured goods across country. The cost is a secondary consideration; time is the primary consideration.

Now with the relatively high price of gasoline (relatively high, because adjusted for inflation the Carter era gas prices and shortages were far worse than today's prices), and with increasing grid lock on a freeway system that--at least here in Los Angeles, has not been upgraded significantly since the 1970's, when there were only half the drivers there are today--a lot of people may choose not to make the trip. But once people decide to make the trip, they're deciding to use the mode of transportation that saves them the most time, rather than perhaps save a buck and use a mass transit system that adds another half-hour to their trip.

Because that's really what the economic decision boils down to: how much is my time worth?

My commute to Santa Monica takes between 35 minutes and an hour to go 25 miles in a car that averages about 25 miles per gallon. At $3.30/gallon for premium here in Los Angeles, this means it costs $6.60 to go to work--up from $5.60 or so from a few months ago. To take the bus would cost me about $2.60 both ways, according to MTA--though I could probably get a monthly pass and reduce that cost--but it would take two transfers, and a three mile (total) walk to and from the various bus stops, with a total trip time of 4 hours.

Even if a monthly pass assume my bus trip costs $1, it takes me at least two hours longer to take the bus.

So is my time worth more than $2.30 an hour?

Now if I don't have to make the trip, then I won't. But given that I do (it's work, after all), then if my time is worth more than $2.30/hour, then the answer is to suck it up at the pump.

Now this raises an interesting question: what is my time worth? And (given the equations implied above) how much would the price of gas have to rise before I decide that it is worth taking the bus?

Let's make two assumptions, to simplify things. First, let's assume that the rise in gas prices is nearly instantaneous--that is, despite the rise in gas prices people continue to drive. Let's also assume that the MTA will continue to subsidize their bus prices. Note that if neither of these assumptions hold true, then the higher gas prices will (a) shorten my commute time, thus increasing the time gap between mass transit and private car, and (b) allow me to improve my gas mileage, since the 25 miles/gallon is an average based on some stop and go traffic. (I actually get around 32 mpg in practice in my 325i BMW on the freeway if I set the cruise control and keep a constant 65 mph.) Both factors argue for an even higher price of gas than the calculations below will reveal.

Okay, looking at my annual salary (as a software developer) I make a fairly good living. I won't disclose the actual amount here, but for argument's sake, let's assume that with 18 years of professional software development experience I only manage to make $100K/year here in Los Angeles, where the high price of living argues for a higher salary than national averages. This winds up being slightly more than twice average salaries for all professions in Los Angeles.

That means my salary is $50/hour. And this is what my time is worth.

Assume that the bus costs $1 one way, that means that as long as my trip by car is less than $51 one way trip (because the one-way time differential is about an hour), I'm ahead in the time verses money equation.

Since it takes a gallon of gas for me to get to work, the price of gasoline would have to rise above $50.99 9/10ths / gallon to make it worth my time to take mass transit instead.

Affect any of these variables (say my commute drops to 35 minutes because of a lack of traffic because people aren't willing to spend $500 to fill their tank, say the MTA decides to raise the bus pass to $50 for a one-way trip because gas is just so damned expensive, and say my mileage rises to 32mpg--and assume my actual salary--then gas would have to rise to over $99.99 9/10 per gallon before it is worth my time to take the bus.

One hundred dollars per gallon before it is worth my taking the bus.

And that's the break-even point, the point where all things are (from a financial perspective) equal. And that does not count the "convenience factor": the fact of the matter is, even if gasoline hit $100/gallon, then there is the matter of convenience: am I willing to pay a premium in order to have the comfort of my own car, even though I may save money by taking the bus? Meaning that even though it is cheaper to take the bus, I may opt to take a car and spend a little more, so I can have the convenience of the comfort of riding alone rather than elbow to elbow with the hundreds of thousands driven to a suddenly overburdened mass transit system.

Trust me; I don't think gas will hit $120/gallon sometime in the next few months, so for now I'm sticking to my car--and the question asked by The Skeptical Optimist just doesn't factor into my thinking at all.

posted by William Woody at 10:19 AM

A very interesting point of view. However I have a different view on some aspects of it.

To use your example...
If I make 100K a year then my hourly time is going to be determined by if I am hourly or salary. If I am salary than I get paid 100K a year regardless if I put in an 80 hour work week or a 40 hour work week. So 100K a year would break down to $11.41 an hour for every hour of that year.

Now if that 100K a year is hourly than you would be at about $48.08 an hour for the first 8 hours. Anything beyond that and you get into overtime which we will assume is free of union contracts and will remain constant at time and a half. This pushes your value of your time to $72.12 per hour.

This would indicate that it is more cost effective for people on a fixed annual salary to use public transit opposed to those earning the same base amount on an hourly basis.

These computations are also assuming that this is the net and not the gross income.

Another factor that needs to be considered is personal comfort. I am sure that I could make more than my current salary (on an hourly comparison) if I were to enter the world of gay porn. Yet I decide to continue earning less because the idea of taking a penis in the rear, even at the pay scale of 500$ for one hours work, is not considered to be adequate compensation for what would be expected of me during that time.

I believe that it is convenience more than time that motivates people.

Anonymous Jake at 12:27 AM  

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