$4 per Gallon Gas – Are We Ready?

With gas prices increasing rapidly, Scott Bernstein of the Center for Neighborhood Technology says the most effective solution is to reduce the demand by creating more "location-efficient" communities.

With some regularity and predictability, Americans begin driving more in late spring, putting pressure on gasoline supplies and prices. Summer 2008 was a watershed moment: gasoline prices topped $4/gallon. Here in Chicago we're rapidly approaching yet another defining moment. Gas prices increased a whopping 36 cents in the two weeks between February 21 and March 7, although the average price has hovered around $3.72 since then.
 
We last experienced $3.72/gallon gasoline on April 21, 2008, so in a sense we're running at least a month ahead of the 2008 price run-up. Lessons from that price spike offer constructive insights about how Chicagoans might avoid the effects of high gas prices this time around and into the future.
 
Between July 2000 and July 2008, the average price of a gallon of gas increased from $1.99 to $4.30 in the Chicago area, increasing three times faster than the cost of housing and six times faster than the region's area median income. The price spike cost the Chicagoland economy-its families and businesses-billions of dollars, with little benefit. We don't produce petroleum or gasoline in Chicago; we consume it. We do tax it, but that tax is a flat per-gallon amount (and has remained the same for decades), so price increases don't do us any good. Chicagoland's households consume 2.4 billion gallons of gasoline per year. Each penny of price increase costs us $24 million; each dime $240 million; each dollar $2.4 billion; and so forth.
 
The current rapid increase in gas prices has prompted talk of opening the nation's Strategic Petroleum Reserve, but this will at best buy us a couple of months nationally, with no assurance of relief here. The best long-term response to rising gas prices is to reduce demand for gas. President Obama spoke about reducing demand in a press conference last week and the need for more fuel-efficient cars. Increasing the energy efficiency of our cars is important, but equally important is the need to reduce the number of miles we drive.  
 
Chicagoans have reduced their driving before. According to the Illinois Dept. of Transportation, annual vehicle-miles traveled (VMT) per household decreased 4.1 percent in the six county region between 2005 and 2009. VMT per household in Chicago fell 2.5 times more than VMT per household in suburban Cook County and the collar counties. "Location efficiency"-a fancy term for convenience and accessibility-accounts for the difference in VMT reductions. Areas well-served with public transit and nearby jobs and services simply require less travel because residents have the option of walking, riding a bike, taking public transit, or driving. The Center for Neighborhood Technology, the organization I lead, has mapped this down to the neighborhood level for Chicago and 336 other regions of the country with our Housing + Transportation® Affordability Index.
 
Our research shows that households in "location-efficient" communities were less vulnerable to the 2008 gas spike. Comparing July 2000 to July 2008 gas prices (and assuming driving behaviors remained the same), we found that transportation costs as a percentage of income increased from 9.7 percent to 12.6 percent for households earning the area median income in the most location-efficient communities. Meanwhile, typical regional households earning the area median income in the least efficient and least convenient places saw their transportation costs increase from 27.9 percent of their income in 2000 to 35.8 percent of their income in 2008.
 
Residents of the most location efficient communities-cities and suburbs served by transit-were able to hold down their costs partly by increasing their use of public transit, and in fact those places saw the greatest increases in transit ridership. Communities with poor transit access had the lowest increases (or even declines) in transit use over that period.
 
The stakes are high. Financial pressures caused by rising gas prices may push households coping with unemployment and under-employment into even greater financial distress-less disposable income, lower savings rates, mortgage defaults and foreclosures, and personal bankruptcies. All parts of our region face this situation, but foreclosure data suggest the suburbs are worse off, given that the number of foreclosures were more than twice the number of foreclosures in the city between 1998 and 2009.
 
There are common sense near- and long-term solutions to the gas price squeeze. Reducing demand for gas means expanding the number of location efficient communities. Projects to make that happen, such as expanding transit, will take a sense of urgency, investment and some mechanism for sharing risk.
 
Picture: A multi-story parking garage in Chicago.Investment is certainly difficult given current budgets at all levels of government. However, Los Angeles is advancing a plan to complete a $40 billion, 30-year transit expansion program in just 10 years. The city is negotiating with officials in Washington to secure federally backed bonds that will be paid off with a half-cent sales tax that residents approved in 2008. One new transit line is already being piloted using this model. Congressional leaders and President Obama have  proposed a national infrastructure bank that would allow other regions to share risk with the federal government. A local-federal approach could accelerate CTA, Metra and Pace improvements and shrink the amount of time Chicagoans will remain exposed to volatile transportation costs. Our new mayor-elect, Cook County board president, and Governor Quinn need to champion this now.
 
There are other ways our elected officials can help Chicagoans avoid the brunt of high gas prices and reduce the cost of living this year. Strategies include:

  • Maximizing the use of employer-administered pre-tax transit benefits, an underutilized "use it or lose it" federal tax break. Employees can save up to 40 percent on their commuting costs, and currently Cook County employers can receive up to $1,700 for enrolling employees in the program.
  • Committing to maintain transit service despite ongoing budget problems. Cutting service would transfer even more transportation costs to the city's residents, which would be counter-productive to economic recovery efforts.
  • Promoting car sharing and carpooling. Chicago's homegrown car sharing company, I-GO, can get people where transit doesn't. Members save over $5,000 annually by sharing instead of owning a car. Roughly 400,000 Chicagoland commuters already save money by riding to work with a friend. Our leaders should encourage more of that.
  • Creating a comprehensive plan for the region's transit system that will position Chicago to take advantage of new public resources as they become available. The federal government is working its way through the reauthorization of the surface transportation bill, and savvy local initiatives that lower the cost of living and doing business while creating jobs are those likely to receive support. 

Our region's households and businesses spend over $60 billion annually on transportation, representing a $60 billion drag on economic recovery. The status quo is no longer an option. The region's newly elected leaders need to move quickly to protect their residents from volatile transportation costs.  There's no time to waste.


 
Scott Bernstein is the president of the Center for Neighborhood Technology, which is based in Chicago.

 
 

Comments

Comments

Microeconomics

Our goal should not be to curb demand in order to lower gas prices. It should be to curb demand in response to permanently higher gas prices.

If I find a way to drive 50 fewer miles because gas is now $4/gal., someone else somewhere else will buy an extra gallon of gas that is marginally cheaper because I drove 50 fewer miles. I save money; the net consumption of gas and production of CO2 is the same.

I agree with you on strategies to reduce gas demand. But unfortunately the one threat bigger that "volatile transportation costs" is costs low enough that our addiction to oil continues unabated.

Fuel prices just capitalize into location price premiums

Here is the root problem with the urban planning approach so far. Few planners understand urban economics. Anthony Downs' "Still Stuck In Traffic" (2004) had some extremely lucid explanations that obviously few people have taken any notice of. But there are plenty of academic papers now regarding the land price effect.

The problem is that property prices reflect fuel prices anyway. Rising fuel prices will result in increases in the price of efficiently located property. So the location decision process of households, ends up back to square one; they have to trade off the cost of travel and the cost of housing.

What tips the balance in favour of "housing costs" rather than transport costs, is the "dead" component in housing prices; the component that relates to regulatory distortion, and speculation in property including fringe land. In fact, the fringe land prices are a vital "denominator" of ALL urban land values in a city - everything tends to derive from "the price of fringe land plus location premium".

The bigger the "dead" component in property values, the greater weight "housing cost" will have in location decision making, regardless of how expensive fuel is. Anthony Downs in 2004, calculated that a "median price" in the housing market of $170,000, was the tipping point at which housing costs start to outweigh transport costs. The further BELOW $170,000 the median price, the MORE important "transport costs" will be relative to "housing costs".

THIS is why infill of fragmented land occurs faster in Houston than in Portland. This is also why Portland's "urban density profile" is distorted towards the fringe instead of the centre, actually INCREASING average population distance from the CBD.

This is also why Prof Alex Anas of SUNY-Buffalo even suggests zoning land "strictly urban" for miles around cities - to remove even its "agricultural rent" value, and provide efficiency-boosting low land prices for the whole city. The urban efficiency gains far outweigh the lost agricultural production. This is kind of going even FURTHER than merely abolishing the UGB. Besides the UGB having completely negative effects on urban efficiency by forcing land prices up, it is actually possible to achieve much greater efficiencies than "lassez faire" by using regulations to force the price of fringe land down instead of up.

I tell you, the guy who gets this across to the Planning Profession and becomes a celebrity in the process, is a modern day JFK, Einstein, and Mother Theresa. I sure am getting nowhere with this on Planetizen, the leading edge planners site.

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