The High Cost of Gas
By Chris Wood, CPA - Last weekend I went to South Carolina for a reunion of fellow accountants that I used to work with on a major consulting job I had in Louisville. The Company in Louisville relocated to Pittsburgh. Then it was sold and moved to Cleveland. Besides our host who lives in South Carolina there was one person from Chicago, one person from Cleveland (who canceled) and myself from Columbus. My friend from Chicago had just bought a motorcycle, so we were compelled to go to the Thunder Tower Harley Davidson dealership in Columbia, SC. I always try to buy tee shirts with some local connection for my daughters when I travel out of town.
I asked my friend “Why did you buy that motorcycle? You haven’t ridden one since high school”.
“Quite simple really; my Jeep gets about 12 miles to the gallon and my new bike gets about 53 miles to the gallon”. He replied righteously. And why not have a righteous attitude. A barrel of oil has just topped $117 with no end in sight and a gallon of gas is now $3.60. I want to save too, but I drive a Sentra that gets 34 MPG. I drive 100 miles round trip per day. Let’s do the math:
Looking pretty good, but wait a minute. It will take three years to pay off the bike. So what’s the price of gas three years in the future? We could take a look at the recent history. Let’s see, Google “US gas history”, download, pivot, filter for 2005 through today, insert a graph, format a little, and we get:
Gas has increased from about 1.80 in January of 2005 to about 3.40 in April of 2008. That’s nearly a 90% increase in 3.3 years. So if we assume a similar increase, and why not, it could even be more with increased demand from China or another major terrorist attack. We would be might be looking at an average price per gallon of 4.67 ((3.4-1.8)/1.8*3.5*1.5). Now we get:
Now we’re starting to talk some serious scratch, but wait just another minute. I can’t ride the bike during the winter. I can’t ride it when it’s raining, and I can’t ride it when I’m traveling out of town. So when my friend asks me “Why did you buy that motorcycle? You haven’t ridden one since high school”.
I’ll righteously reply “Because the chicks dig it”. And why not!