I have used the following simplistic equation in the generation of the following graph.
Average Miles Per Gallon * Historic GDP per mile driven * Gallons per Dollar
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21 miles 3.5 GDP dollars 1 gallon
---------- * ---------- * ----------
1 gallon 1 mile X dollars spent
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Where X is the cost per gallon of gas. This leaves us with an equation of the terms GDP dollars per dollar spent on gas.
Now another interesting thing I’d like to point out from the US perspective, becoming increasingly dependant on foreign sources of oil will have a drag on the "Net Export" part of GDP. If you pay 5 bucks for that gallon of gas and you get 70% of your oil from foreign sources you have paid 3.5 dollars off of GDP because GDP includes net exports. The Current US import rate is around 60% and rising. I’ve used the 70% number for that reason. The equation used was GDP - 70% of gas price. Note that this number becomes more important as the price goes up.
Arguably the number has been included in the current GDP numbers because the amount imported oil has went from 0% to 60% over the last 35 years while the GDP number has stayed constant, but I would like to point out the difference between that 0% and 60% is less than 5% of the GDP change and falls within the error margin of this 3.5 GDP per Mile number given by Staniford. But as we increase the cost per gallon, it becomes more profound. This allows us to calculate a break-over point after which driving becomes an economic loss. To me, this means the end of the status quo. I don’t know what will follow it, but I can reasonably say that we will have to see a different economic structure at the following price point.
As for what comes after, a follow up done by Victor at Dead Parrots shows a way to attain an 8.5 to 1 ration of GDP dollars per mile namely, the WWII wartime economy. But I include this scenario along in the "change of the status quo" basket. Even in this case, the ratio goes negative at about $15 dollars a gallon. But you’d assume oil acquisition as a pretty high priority with this “wartime economy”, so anything goes in that scenario and the driving to GDP metric probably breaks down.
To those of us stuck reading the tea leaves, I think this chart can provide a useful measure of how the US Economy will fair against sustained high oil prices. When gas hit the 3 dollar price the US economy produced 22 Dollars of GDP per mile driven and we had the worst retail month since September 2001. When gas hits $5 per gallon, we’ll each only make half as much on average. By the time it hits $9.50, we are spending more on gas than we get back in GDP. Beyond that point, no balancing of the books will hide the fundamental imbalance in the US economy.
As long as the status quo holds, this particular relation will likely hold. Given that, we can use our friendly local gas station as a timely barometer of the US economy. If you see the price hit $10, expect substantial change in somewhat short order. If you were looking for a "bug out" price, you have it now. Perhaps if we all know where the wall is, we can persuade others with the evidence so that we can collectively avoid it. Forewarned is forearmed.
Let me know what you think!
