Price of Gas: Is $5 The New Standard

April 1, 2011

When gas prices rose to dizzying heights in 2008, it threw our economy into a tailspin. The breaking point was $4 a gallon gasoline. Back then, the rise in price for gas was so quick and unexpected that it literally shocked the American consumer and thwarted our economic wellbeing.

As a result, the price of gas-guzzling SUVs dropped like a rock, and the largest SUVs couldn’t be given away because no one could afford to keep gas in the tank. Everyone wanted a gas-electric hybrid and “downsizing” was the operative word in all classes of vehicles.

$4 gas

I live in the San Francisco Bay Area. I just filled my tank and paid over $4 a gallon for the least expensive regular gas I could find. Yet, the world isn’t coming to an end. Instead, nationally there has been a thoughtful “downsizing” to save on fuel expenses, and in many areas of the country car sales are robust. Truck sales were even up significantly earlier this year.

Why the difference? It seems that the American public has adjusted to higher gas prices. Also, the latest rise in price was slow and steady in the beginning, allowing a more stable adjustment to the change.

However, there is another reason. The last time the price of gas spiked, the vehicles we drove reflected our lack of concern about fuel economy. We have not just adjusted our attitude about gas prices, but for the last few years we have been slowly downsizing the vehicles we drive. This has lessened the current impact of rising gas prices.

At the same time the auto industry has been working feverishly to increase the fuel efficiency of most of the vehicles we drive.  An example is the Ford Explorer, which was wildly popular across the country a few years ago. The 2006, 2-wheel drive Explorer had a 4.0 liter engine and was rated at 14 miles per gallon in the city and 19 mpg/hwy. The Explorer was recently redesigned and now has a smaller 3.5L engine that gets 17 mpg/city and 25 mpg/hwy. This is a huge shift and it reflects what’s happening with all car makers and in all classes of vehicles.

The new standard

I wonder if the new breaking point for the American consumer’s attitude toward gas prices is $5 rather than the old standard of $4. I know that with $4 gas, I’m not making any changes to my driving habits. I have fully adjusted to the reality of higher gas prices.

However, what will my attitude be when the price of a gallon of gas creeps up to $4.25 or $4.50? How about $4.75? And what will happen to my driving habits, and those of millions of Americans around the country, when the price of gas hits $5 a gallon? Will that be the new standard that shocks the American consumer and thwarts our economic wellbeing?

Time will tell.

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