$9 / Gallon Gas in Italy – And The Effect in the US

Recently Bloomberg had an article about Italian gas prices exceeding $9/gallon.

Austerity measures introduced by Prime Minister Mario Monti’s government have pushed Italian gas prices to the highest in Europe, an average of 1.82 euros per liter, or $9.17 per gallon, with taxes accounting for about 54 percent of the total,

The article goes on to talk about how this price increase impacts ordinary Italians just attempting to get around and go to their job.

The Italians hit hardest by higher gas taxes are those like teacher Cioni — working people who live in areas poorly served by public transportation.

Even in the US, where taxes on gasoline are high but do not comprise 54% of the total cost like they do in Italy, driving now requires actual trade-offs as you near $5 / gallon gas.

In the suburbs of Chicago you typically drive long distances during the normal course of the day. For instance it is over 30 miles from the Chicago loop downtown to Naperville each way. Since you probably will be driving around a bit when you get there, it is reasonable to think that you might burn 3-4 gallons of gas depending on traffic and mileage, along with $5 in tolls (depending on the route you take). If you figure that gas is $5 / gallon, then that round trip just cost TWENTY DOLLARS. Note that this analysis doesn’t consider the wear and tear on your car… this is just the incremental cost of the journey.

I remember growing up that $20 was a lot of money. You could live for a few days with $20 in your pocket (just the occasional fast-food meal, some gas, etc…). Now you spend $20 EVERY TIME YOU GET IN THE CAR.

This type of taxation does severely punish the “working” poor. It doesn’t punish the poor who aren’t working nearly as much, because they can take the laborious time to use whatever public transportation is available. The working poor, on the other hand, are essentially “on the clock” and if you are near or a bit above minimum wage you are probably taking home maybe $10 / hr after taxes. Thus the trip from Naperville (or a nearby suburb) to and from Chicago just took up TWO HOURS of your working time.

A family member who lives in Naperville talked about a neighbor who works at a popular (casual) restaurant in the city as a waitress and I started doing the math in my head… the money would have to be significantly better than from a local restaurant just to make up for the difference in gas prices and tolls alone.

I expect that over time gas prices at this level will significantly impact car-buying behavior.  When I purchased an Altima in 2010 (which I subsequently sold to a family member because it was too big for my parking garage and accumulated wear and tear) I bought a 4 cylinder engine, which made me seem like a minority on the highway because everyone else seemed to have a 6 cylinder.  However, the 4 cylinder engine (which is fine for a cruising car like the Altima, it isn’t a sports car after all) gets better gas mileage which will pay off very quickly with gas at $5 / gallon.

I expect that kids learning to drive will begin to associate driving with a very high marginal cost – i.e. each time you get in the car, money is flying out of your pocket.  When I started driving insurance costs were the big barrier, followed by the price of the car and then gasoline.  Thus once you bought and insured the car, you might as well drive it. Behavior that lasts a lifetime often begins when you are first starting out, so those that are starting driving today might view it as an occasional luxury or something to do as a necessity rather than as an activity in the normal course of life.

For the working poor, high gas prices tied to high taxes (especially in Europe) make their lives much more difficult because it cuts right against their take-home pay and often they need to drive to reach their jobs.  Since the poorer individuals often live far from where the jobs are located in the service sector (i.e. downtown Chicago is where a lot of night life is but the cheaper housing is often in the far-flung suburbs) this will limit their opportunities to local employers which could cut their opportunities significantly.

For younger people starting out, the incremental cost of a trip will make driving a much more “thoughtful” experience and trips will often be combined or deferred altogether.  Since habits you develop as a teenager often stay with you for many years or even a lifetime this could cause a seismic shift in behavior, away from driving.  Whether that is good or bad depends on your position; it certainly hurts the vitality of the economy because for most parts of America public transportation is not convenient, reasonably priced, or even available.

Cross posted at LITGM

17 thoughts on “$9 / Gallon Gas in Italy – And The Effect in the US”

  1. My daughter is wrestling with this – she works regularly as a delivery driver; sometimes she drives the company vehicle, and sometimes her own (for which she gets a little more money). She also commutes to one of her part-time jobs (she can walk to the other)and as of this week it is around $55 to entirely fill up the tank of her Montero. Which is a lovely little sport-utility, and the one car that she feels comfortable in after a wreck on the highway some years ago which completely demolished her little gas-effecient Mitsubishi coupe. We calculate the Montero gets about 22 MPG on the highway
    My own car, an Accura Legend now has electro-mechanical issues, which I can’t afford to fix as of yet – we would love to use it now for most things, rather than the Montero. It’s a champ when it comes to mileage – I drove all the way to Houston on about 3/4ths of a tank.

  2. I remember something during Bush 43rd’s time. We were having a price spike and Bush, the former oilman, did something that affected the futures market to drive the price down. What he did I can’t remember but on Rush today he surmised that Obama would probably, just before the election, approve the Keystone pipeline to drive the price down in the futures market.

    I do believe that he will try it.

    But to the immediate question – I have 2 cars that I have had for years – one a small sports car, gets 30+ mpg and the other, an old 6 cylinder MB, gets 20. Before I got my latest job the MB would sit for 3 days while the MR2 got used that time – like a bag of golf clubs the driver gets used less than the irons. The MR2 will be used more!

    This cost of course will permeate throughout the economy – driving up the cost on all goods. And driving habits will change.

    We’ll see what the future brings but if the cost doesn’t go down it will change dramatically.

  3. Sgt – I am admittedly swaying off topic but hopefully for a good reason – your Acura – think recycling yards. If the problem is diagnosed and the part is expensive these places, most of which these days specialize in particular marques – do miracles.

    I stopped by at my friend’s MB shop and we had a conversation about new car vs old car technology – he believed – as do I – that cars will be retired not on mechanical issues (engines and drive trains are more reliable than ever – and efficient – than ever – but electronic issues.

    He made one more interesting comment – that so many independent body shops – whose primary business is insurance jobs from collisions – many of these shops are going out of business because even with minor physical damage, insurance companies are totaling cars because of the cost of replacing electronic components.

    A recycling yard can mean the difference between keeping your car and retiring it…

  4. To Bill Brandt,

    When Bush made oil more available, or signaled approval for more drilling, he was serious about continuing that policy. He credibly changed the future, and future prices reacted accordingly.

    When Obama approves the Keystone pipeline, there will still be doubt about him later removing or slowing that approval. We know that his other policies will slow oil production or make oil more expensive. So, the future doesn’t change much and futures prices won’t either.

    Obama’s intent is clear. What he says is irrelevant.

  5. I had to laugh at the story of the daughter driving to her waitress job. My daughter has a job as a waitress in Tucson as well as being a full time student. Two years ago, she was going to college in San Diego and working in Mission Viejo as a waitress. Those two cities are 60 miles apart. I didn’t have the heart to tell her that her waitress job was costing me $1400/ month for gas. Imagine what it would be now. Thank god she is back in Tucson and her gas bill, though high is less.

  6. Michael – I was thinking of some of the commute times – and jobs – Californians have and how this gas price will affect this long term.

    It is not unusual for Southern Californians, working in the Los Angeles area, to have a home in Palmdale or Lancaster – what is that a good 60 mile commute? Each Way?

    Or people working in the Bay Area to have homes in the Central Valley – a good 100 mile commute – each way.

    Real Estate prices are driving this.

    I suspect rather than give this up they will get high efficiency diesels – even an MB E Class diesel now gets mileage approaching 40mpg on the freeway – the smaller ones, like VWs, get in the 50s.

    Hopefully we will get a President who had a good basic understanding of economics, something missing in Washington these days.

    Reminds me today I am walking out of a store and a familiar sight was at the exit – a petition gatherer for a California Initiative.

    Normally in my curmudgeonly state I ignore them because I don’t like to spend time getting to the real meaning of the wording – always intricate and usually misleading with a cursory read.

    However I was in a social mood and asked her what this petition was about – they need about 700,000 valid signatures of Californians currently registered to vote – to appear on a statewide ballot.

    Anyway, she says “This is to make hospital costs lower”.

    Well I ask her how this accomplishes that and after a lot of evasiveness, says that they will simply put price controls on what they charge.

    I asked her if she had any understanding of market forces and suggested that the government controlling nearly every facet of how they can operate is largely responsible for the prices today.

    Needless to say, I didn’t sign the petition.

    Perhaps in my typical wandering and meandering when posting, I have stumbled on the reason for our high gas prices, too ;-)

  7. Ha ha that isn’t my new ride it is an ancient Honda I saw on a recent trip in California. I took a photo of it because my long deceased grandparents had one a model right after it in brown. I think it captures the seismic changes that occurred in the 1970’s when gas prices shot through the roof and people groped for alternatives to cars with low gas mileage. Probably in most places that’s too subtle of a link but I figured here at Chicago Boyz they’d get it.

    Also interesting to me at least is how long cars survive in California. In Chicago everything is a bucket of rust in 10-15 years due to the winters and salt on the road. You never see anything like this in Chicago. I noticed the same mix of ancient and bizarre cars when I went to Tasmania in Australia about 15 years ago (which probably has a similar climate), although with the boom in Australia since then maybe they are all driving luxury cars by now.

  8. Jonathon – I would qualify that as saying “sometimes” – in the Bay Area – a Peninsula – there is no more land to build – ditto for the Los Angeles area.

    There is an enterprising builder in San Francisco building closet-sized condos – 300sf? – he hopes to get the young 20 somethings – for $300K or so – whatever the square footage it is the minimum the zoning requirements will allow – http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/08/23/BUTM12GQMI.DTL

    Other areas – like Davis – in the Central Valley – the people who are already there feel the city is big enough and enacted no growth policies

  9. Closet sized places for single adults right near downtown are a great idea.

    An in law of mine rented a place that was literally 10 feet by 15 feet… 150 square feet – with a tiny bathroom and shower (you had to go inside then shut the door) a galley kitchen that was tiny and a murphy bed. She was very happy there.

  10. About small houses: In most built up areas where they would be most useful they would be prohibited by code. In those areas where land is not so expensive, there is an interesting dynamic which might be unsurprising to many people but astonishes others…

    Since a house is, essentially, shell with three dimensional space inside, to a first approximation the space gets cheaper as the house gets bigger.

    The shell is also the escape route for energy, and the surface upon which most maintenance occurs. If you can use the space, and up to a point, bigger is cheaper. Past a certain point other factors start entering into it, but it is a mistake to assume that a small house is necessarily better or cheaper than a larger one.

  11. It is cheapest to drive a motor scooter. 100+ mpg. Equip it with a windshield and mirrors so you can dodge the raindrops and careless drivers. A scooter is better than a motorcycle because you can hold a bag of groceries (always get paper & plastic) on the floor between your feet. And you also get room for saddlebags, passengers or your Golden Retriever. Make sure you have rain tires.

  12. Sol – years ago when I was in Germany i had a chance to get a moped cheap – and after viewing the way the drivers were I thought it was near suicide. At least with a motorcycle you have enough power to hopefully get out of the way – they seem to be making some hybrids – scooters with motorcycle power

    I remember – at the same time – riding on the back of a friend’s Norton 750 Commando (I told you it was awhile back) – we were passing those Opels and Fiats like they were standing still – and me worrying that my butt was gliong to slide off the back with each downshift ;-)

    Imagine having a little Vespa in the middle of a busy intersection and seeing a big truck barreling down on you

  13. I learned to drive a Vespa scooter in Paris July traffic (August is different because everyone leaves town except the tourists). Traffic barely moves which means I could drive between the lanes and pass all the cars. Police were scarce and on foot.

    The safest way to drive a scooter is without a helmet because then you can hear cars coming from behind and dodge them. Scooters are best in rush hour traffic – most dangerous when traffic moves faster than 40 mph. Otherwise riding a scooter on a highway follows the same rules as walking on a highway.

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