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Charles Wheelan, Ph.D. The Naked Economist

Charles Wheelan, Ph.D., The Naked Economist

High Fuel Costs Could Spur a New Rationalism

by Charles Wheelan, Ph.D.

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Posted on Monday, June 9, 2008, 12:00AM

Gas prices are at $4 a gallon and still headed north.

So far, the obvious things have happened: SUV sales are plummeting, airlines are mothballing gas-guzzling planes, Americans are driving fewer miles for the first time in modern history, and mass-transit ridership is growing everywhere.

Higher Cost, Less Use

That's pretty much what economics would predict. When something gets more expensive, people try to avoid the pain. The best way to avoid the pain of higher gas prices is to use less of it.

I will add, perhaps gratuitously, that the behavioral changes we're seeing now are exactly why we should have implemented a carbon tax (with offsetting income tax or payroll tax cuts) 10 years ago. Given that we have to raise revenue somehow, we ought to do it by taxing behaviors that we would prefer to discourage. An income tax discourages work; a carbon tax discourages pollution. Which one makes more sense to you?

Those who pay the most under a carbon tax are those who are the most intensive energy users -- and therefore impose the greatest environmental costs on the rest of us. Making them pay more seems fair to me, provided there's some cushion for low-income workers who have no choice but to commute long distances.

The Long and Short of It

But I digress. The point of this column is that are still a lot more shoes to drop as the result of high oil prices. We've only seen the first wave of behavioral changes. If gas prices stay high -- and I have every reason to believe they will -- then we can expect a series of other social changes that are less obvious and longer term.

Economists speak about the "short run" and the "long run." Believe it or not, these are actually technical terms. In the "short run," many factors of production are fixed, meaning that individuals and firms can only modify their behavior in some ways. A person can start taking the train to work in the short run, for example, but he can't easily sell his house and buy a smaller condominium with a shorter commute.

In the "long run", everything is up for grabs -- where we live, how we live, how we get around, and even where we go. Smart folks ought to start thinking about what happens when energy prices are four or five times what they've been for most of the automobile age. It's not rocket science: Prices go up, and rational people and firms try to avoid those higher costs.

Rational Steps

Here's my list of what this means in the long run:

1. Dump the McMansion.

There's been so much wreckage across the real estate market that we've neglected likely trends. The ironclad law hasn't changed; it's still "location, location, location." But the definition of a good location is certainly different if gas is $4 a gallon -- let alone $6 or $8.

Those giant houses 50 and 60 miles from the metro core now have three strikes against them: 1) Low-density development is rarely near public transit; 2) The resulting commute by car is wickedly expensive; and 3) The whole point of living that far from a metro area is to get a bigger house, which is now more expensive to heat and cool.

Other neighborhoods will emerge as a lot more attractive. We'll hear real estate agents say things like, "And you can walk to the train station." Americans might even develop more of a taste for condos and apartments. Nothing lowers the utility bill in the winter quite like having a common wall on two sides and heat wafting up from the apartment below.

2. Firms might begin to make business location decisions based on the commuting costs of their workers.

Suppose you're considering two jobs: One is in a building three blocks from the commuter train station, and the other is in an office complex 21 miles away from anything except cornfields. How is that decision affected by $6 gas?

In 1989, the retailer Sears closed its headquarters in the Sears Tower, a Chicago skyscraper, and moved 5,500 workers to a lower-cost campus in suburban Hoffman Estates, 30 miles from downtown and virtually inaccessible from most parts of the region by public transit. That kind of thing just isn't going to happen as much anymore. Sure, firms will still be looking for low-cost real estate, but they usually need high-quality workers even more -- and mandating long, expensive commutes is a good way to lose scarce human capital.

3. If you add it all up, the next several decades will be relatively good for cities -- at least compared to the last half century.

Part of this is driven by more expensive gas, as described above. But there are other forces at work, too. Worsening traffic congestion will make long commutes more costly in terms of time, not just money. Many aging baby boomers will seek urban culture and entertainment offerings (and more diverse housing choices) as they find themselves "empty nesters." Violent crime -- often one of top reasons for fleeing cities -- has been falling steadily for more than a decade. Both Chicago and New York City had the fewest number of homicides in 2007 than in any year since the mid-1960s.

The suburbs are not going to shrivel up and die. They tend to be lovely places, and most urban areas still haven't managed to cobble together decent public schools for middle-class families. But for the first time in a long time, basic economic forces will favor density over decentralization.

4. There will be a huge "first mover's advantage" in alternative energy.

At some point, we'll develop a better source of energy than oil. I don't know if that will be 10 years from now or 50. But it's going to happen, and the nation that's first in making that important discovery (or series of discoveries) will enjoy a huge economic windfall -- not unlike what the Internet has bestowed on the United States, and on Silicon Valley in particular.

If we want to be that "first mover," then the U.S. government should be investing Manhattan Project-type sums in alternative energy research. The private sector does a terrific job of turning knowledge into products, but only near the end of the product chain. Basic research -- the kinds of discoveries that are essential to progress but can't be patented -- is the catalyst for that process. Let's not forget that the Internet grew out of work that began in the Defense Department and was cultivated at Stanford and Berkeley.

An Expensive Irony

There is some irony in all of this. "Smart growth" advocates have been calling for these kinds of policy changes for decades: More redevelopment in existing urban centers (as opposed to new "greenfield" sites far from existing infrastructure); higher-density housing around transit modes; more coordination between new housing and public transit; and so on. It's ironic that $4 gas will encourage all of those things for reasons that have nothing to do with altruism.

Of course, it's also true that if we'd implemented more of those policies in the past, such as more investments in public transit, then high gas prices wouldn't be biting us as much as they are now.

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321 Comments

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  • Michael M - Sunday, June 29, 2008, 8:38PM ET  Report Abuse

    • Overall: 1/5

    Everyone has this wrong so I shouldn't fault you for just following the herd. The price of oil is going up due to the expanded money supply in America. Oil reserves and output are as high as ever and enough to meet demand. The price isn't going up because of supply and demand. In fact, the price REAL price of oil is not going up. We're paying more because our money is worth less and since so much of the world is currently basing much of their economy on the dollar it looks like it is a global issue. But once all of this shakes out we'll all be looking back at our government for printing money with no backing to continue what they call an 'economic expansion' to win the politicians votes. There has been no economic expansion in America just more spending. But we don't really have greater wealth than we did in real, global terms and that is going to catch up with us very soon. Our debt, our deficit and our money supply are causing these high prices - and it will not stop with oil. Next year politicians will blame all of our higher prices on oil but they are really the fault of our politicians. You heard it hear first... but then you ignored it so it's only going to get worse before it gets better.

  • Anandakos - Friday, June 27, 2008, 2:17PM ET  Report Abuse

    • Overall: 5/5

    Dr. Wheelan, Congratulations. You have applied cost-benefit analysis in this post in its true spirit: determining the best solution to a problem. You are a genuine economist. Too often a form of pseudo-cba is used to justify fang and claw privatization by externalizing the costs. It's gotten a bad name at the hands of the Cheneyites in both parties. But this article is an excellent example of how it can be used by individuals and organizations to plan for inescapable trends. The truth is, whether "peak oil" is reached this year or in two decades, eventually the stuff will run out, regardless of our technological prowess and T-Bone bravery. It doesn't exist in the abyssal depths of the Pacific basin, half the planet's surface. It doesn't exist in granitic upthrust mountains, another 10%. And it doesn't exist in basaltic flow plains. Most of the environments hospitable to oil deposition and capture have been poked at. Sure, more deposits will be found, but the dirty secret of the peak oil curve is how FAST it falls, because all during the uphill side new consumption comes into being in concert with the increased production. The consumption does not fall as rapidly as the potential maximum production onces the peak is reached, so the remaining reserves are typically consumed in 1/4 the time that the first half was. A NASTY prospect, to be sure. Assuming the people alive today would like to see humanity surviving and thriving in a milennium (that seems doubtful at times when one views the lust some folks have for "The Rapture") the energy economy must become entirely rooted in solar (direct capture and wind), gravitational (tidal), and geothermal sources within a couple of hundred years. Why not start now when we still have at least some of the concentrated fossil sources needed to build the more diffuse infrastructure needed to use these sustainable sources? Even if tomorrow someone conclusively proves that climate change/global warming is not caused by human exploitation of fossil fuels, THEY WILL RUN OUT in the what is only a blink of an eye in the history of mankind.

  • Gary B - Tuesday, June 24, 2008, 8:30AM ET  Report Abuse

    • Overall: 5/5

    The best thing I did was resist the temptation to buy a house in 2006. When I do buy a residence, it will be somewhere near public transportation. We're a two-car family... perhaps a one-car family someday.

  • Yahoo! Finance User - Monday, June 23, 2008, 5:49PM ET  Report Abuse

    • Overall: 5/5

    Lessons should have been learned in 1974. Check out Amory Lovin's "Winning the Oil Endgame which is the Rocky Mountain Institutes detailed 2004 roadmap for getting the United States completely off oil by the 2040s, without needing new taxes, subsidies, mandates, or federal laws." WORTH the read America. http://rmi.org

  • Bryan - Sunday, June 22, 2008, 7:39PM ET  Report Abuse

    • Overall: 3/5

    The only good thing about this guy is that he does make you think. Although I don't agree with him most of the time, he does cause me to think about things. I think he's correct about energy costs, but, his tax ideas are totally out there. He's obviously a bleeding heart democrat at heart who likes to tax people and believes in more government, not less...

  • Yahoo! Finance User - Friday, June 20, 2008, 3:17PM ET  Report Abuse

    • Overall: 1/5

    Your "first mover" comment is puzzling. The US government did invest in developing a new energy technology that does not have a carbon footprint. We don't have to wait 10 or 50 years for the discovery. We may have to wait 50 years for the lobbyists who fund politicians to block further deployment of this technology to get out of the way. It's nuclear power. And contrary to what many wrongly believe, we do have the capability to safely deploy this source of energy.

  • Doreen - Wednesday, June 18, 2008, 3:08AM ET  Report Abuse

    • Overall: 1/5

    He's stupid about the carbon tax. The biggest uses of petroleum are the companies that transport goods, and they'd pass on the cost of that tax to the poor consumers buying the toilet paper that had just come off the truck.

  • Yahoo! Finance User - Tuesday, June 17, 2008, 10:13PM ET  Report Abuse

    • Overall: 5/5

    IF these predictions turn out to be accurate it will be hard not to feel some measure of pleasure since Americans have ignored the warnings for so many years. Also it is interesting to note from the comments on this article that people who confuse the words "their" and "they're" are also the ones who give it the lowest rating. Hm!

  • Jill - Sunday, June 15, 2008, 10:15PM ET  Report Abuse

    • Overall: 1/5

    Some of us have no choice. Mass transit is not an option because it does not exist in my area. I have to drive 40 miles each way to work. Oh I could drive less, and earn far less that would not compensate for the gas.

  • John - Sunday, June 15, 2008, 9:17PM ET  Report Abuse

    • Overall: 1/5

    Thank you captain obvious. If fuel prices remain high demand will eventually plummet and we will start the cycle over. We have seen all of these arguments made before. We really need a tax on politicians.

  • Drew - Sunday, June 15, 2008, 8:22PM ET  Report Abuse

    • Overall: 4/5

    Well, not all of suburbia requires a long commute. I live in the KC area and there are more job opportunities in Overland Park/Olathe/Lenexa (all suburbs) than there are in the city... If gas really goes to $6 or $8, then companies are going to find that they have to allow employees telecommute more where possible. That could prove to be a salvation for suburbia. If I don't have to drive anywhere to work, it doesn't matter where I like... Actually, if there is a true victim of high gas prices it's going to be the airlines. When a domestic airline ticket regularly costs in the thousands and affordable technology exists to meet with someone remotely realistically enough that it looks and sounds like both people are in the same room, most airlines will have a hard time developing a realistic value proposition.

  • curtieh - Sunday, June 15, 2008, 7:37PM ET  Report Abuse

    • Overall: 1/5

    A carbon tax!? That's what this country needs to compete globally and another tax to put on the consumer. We need figure out how to prevent financial oil speculation that has no merit which causes hedging (WALLSTREET!) driving the price of oil through the roof.

  • kats - Sunday, June 15, 2008, 11:01AM ET  Report Abuse

    • Overall: 5/5

    Thank heaven you got so many negative responses. We are trying to sell our house in suburbia before too many people notice what's going on.

  • david c - Sunday, June 15, 2008, 10:40AM ET  Report Abuse

    • Overall: 2/5

    - The whole point of living that far from a metro area is to NOT to get a bigger house; it's to get an AFFORDABLE house. - The people who went to such lengths to own a home will develop a taste for having a common wall on two sides and heat wafting up from the apartment below? What are you smoking? - In 10 years, most will driving an electric or a fuel cell car. e.g. 500 miles on a four hour charge. Back to the future (suburbs). You are correct about government investing in energy. Where was our JFK in the 1970s when we needed him? (the internet grew from a DOD ARPA investment in the late 1950s).

  • Yahoo! Finance User - Sunday, June 15, 2008, 9:50AM ET  Report Abuse

    • Overall: 1/5

    What a jackass. Using the term "McMansion" is meant to denigrate anyone who aspires to living in a larger home. Of course a regular "Mansion", you know, the kind Al Gore lives in, is quite okay. Mansions and estates are for the monied elite, didn't you know that? "Americans might even develop a taste for condos and apartments..." We might also develop a taste for foraging and oxcarts. Mr. Wheelan can have his "common walls on two sides" so he can hear his neighbor's stereo and crying babies all night long. I have lived in apartments with shared walls my entire adult life. It's horrible. But it's city-dwelling idealogues like this idiot who would impose a carbon tax to make his cramped, crime ridden urban lifestyle more appealing. The failing, disgraceful school systems and comically high taxes are best left to those who appreciate the finer points of overcrowding, filthy streets, prostitutes, and methadone clinics. Blow it out your a**, Mr. Wheelan, keep the government tax machine out of private citizen's lives, market forces will influence people to make their own decisions. If you can see through the smog from your ivory tower, you might realize that half the population still lives outside cities, and for a damn good reason. Life is better. Much better.

  • BeverlyM - Sunday, June 15, 2008, 9:36AM ET  Report Abuse

    • Overall: 5/5

    Elect this guy President!

  • Yahoo! Finance User - Sunday, June 15, 2008, 6:58AM ET  Report Abuse

    • Overall: 1/5

    Author left out too much: 1. Find more US oil 2. Concentrate on alternative energies 3. Develop better batteries, hybrids, fuel cells, etc.

  • Yahoo! Finance User - Sunday, June 15, 2008, 6:42AM ET  Report Abuse

    • Overall: 3/5

    We are just barely (finally) getting the feeling that we consume too much automobile fuel.

  • Yahoo! Finance User - Sunday, June 15, 2008, 2:18AM ET  Report Abuse

    • Overall: 4/5

    To whom will the baby boomers sell all the McMansions when they want to retire, downsize, etc.? There aren't enough echo boomers, genX, genY, etc. to buy all the McMansions the baby boomers will want to sell. Finally, the baby boomers will be left holding the bag for their own mistake. Previously when the boomers have distorted markets or made mistakes it was others, especially the generations that followed, that paid the price. Maybe the first wave of boomers will get out of their McMansions in time, but this time, perhaps for the first time, the boomers themselves will reap the bulk of the pain caused by their mistake.

  • ThomasC - Sunday, June 15, 2008, 12:05AM ET  Report Abuse

    • Overall: 1/5

    Just awful. Worst Yahoo Finance writer not named Kamenetz.

  • Robert - Saturday, June 14, 2008, 10:06PM ET  Report Abuse

    • Overall: 5/5

    After leaving America to live and work in Japan, I can assure you that there is life after the car. I now live in a metropolitan area, bike to work and save thousands of dollars (yen) every year. I am sorry that people will suffer because of higher gas prices but I believe that the suffering will not be in vain. My hope is that this will force everyone to reduce and eliminate the need for an oil based economy. Start now and you will suffer less.

  • Yahoo! Finance User - Saturday, June 14, 2008, 7:25PM ET  Report Abuse

    • Overall: 4/5

    Ah the McMansion. People paying to heat and cool a lot of big rooms they never even see, let alone use. Excess plumbing breaking from lack of use, taxes, insurance, maintenance, all the lawn equipment and tools you have to buy just to service the place, the handyman and all the other hired help, and other expenses. Wait until the heating bills show up this winter. Why do so many McMansion owners, and those who lease (yes lease) all the car they can (actually cannot) afford, wonder why they'll never amass enough money to retire.

  • EdwinA - Saturday, June 14, 2008, 8:51AM ET  Report Abuse

    • Overall: 1/5

    I do not wish to see the Goverment create another bureau to further screw up a troubled economy

  • Chris - Friday, June 13, 2008, 10:33AM ET  Report Abuse

    • Overall: 3/5

    Although I like the basic outline of the article, I find his conclusions on real estate a bit spurious. I live in a McMansion and like it and my wife and I live 10 miles or less from our work. The problem with displacing people back into the cities is a lack of real estate there, which drives up prices. I like his conclusions on mass transit but I disagree with the prediction that people will start buying condos and renting apartments in cities. It's just out of the reach of the average American.

  • Yahoo! Finance User - Friday, June 13, 2008, 9:08AM ET  Report Abuse

    • Overall: 5/5

    The coming changes will be worth the pain.

  • MIKE - Friday, June 13, 2008, 5:35AM ET  Report Abuse

    • Overall: 2/5

    Rather than adding more government meddling, I would argue for far less. Imagine that nuclear power had been allowed to develop over the last thirty years, that mining oil shale in the Rockies was deemed okay. Imagine that zoning laws were virtually eliminated so that a single large skyscraper could house a supermarket, shopping mall, offices, schools, industries, recreation and residences; thousands of people would be able to do most of their daily living with no need for transportation at all. The free market, unconstrained by government, is the most efficient route to prosperity for our nation and the world.

  • tryxxie - Friday, June 13, 2008, 3:24AM ET  Report Abuse

    • Overall: 3/5

    i find it humorous that the upper middle crust would like to create more taxs for all of us..hears a wild idea tax big oil and jack up the price of everything we export to opec nations untill we do that they will just keep on bending us over that barrel.as for the economist with the phd i was reading an article on msn a week or so ago where one of them was telling the public the cost of all goods and services would go up as a result of gas.i was ranting this to my freinds months ago..seems like somone wasted there time at shcool when all they can tell us is the obvious...untill we hold politicians and big buisness accountable not much is gonna change folks..although we should be thanking big oil on the flip side within a decade or so i think you will see alot more fully electric cars.i hope anyway............

  • Yahoo! Finance User - Friday, June 13, 2008, 2:37AM ET  Report Abuse

    • Overall: 1/5

    Another liberal continuing the decline of the USA.The so called smart people have gotten us in to this mess and now it time to tax us so they can continue living on our backs.

  • HI - Friday, June 13, 2008, 12:06AM ET  Report Abuse

    • Overall: 3/5

    Having come from a poor family (government cheese) to working my way up (I live in california) I always find it interesting when PhDs get this idea that all aspects of society can handle whatever burden is placed on it. Most of his points indicate that he is very, very naive when it comes to the everyday struggle of the average person. Some of his points are good, but they're too abstract. He's a typical PhD, too abstract for reality, not applicable to today's world. I give him some credit for having a unique opinion though. Could be a lot worse, Penelope could come back...

  • Yahoo! Finance User - Friday, June 13, 2008, 12:00AM ET  Report Abuse

    • Overall: 4/5

    Add maintenance, taxes, time consumption, and especially changing demographics to the list of woes of McMansions. Aging boomers won't want the expenses or the work. Dumped my McMansion a few years ago for a condo and I'm thrilled. Less work, more freedom. Utility bills dropped like a rock. I'm never going back to anything but a condo or smaller sensible house. Glad I thought of this years ago before the bust.

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