Skousen: How to Adapt to High Gas Prices as They Impact the Economy

World Affairs Brief, May 30, 2008. Commentary and Insights on a Troubled World.

Copyright Joel Skousen. Partial quotations with attribution permitted. Cite source as Joel Skousen’s World Affairs Brief.

HOW TO ADAPT TO HIGH GAS PRICES AS THEY IMPACT THE ECONOMY

In one of the most outrageous examples of price gouging ever witnessed, fuel prices have risen almost 10 cents per gallon per week now for more than a month. The American consumer is being held hostage to an economic and personal lifestyle that was established a century ago based upon an abundance of cheap oil and is now locked into our economic infrastructure. Most people have no ability to escape what is now upon us and getting worse. All of our cities are developed around the commuting lifestyle, allowing Americans to live in rural or suburban openness to escape pollution and city overcrowding. We travel long distances on fast freeways to get to work and none of that can be changed quickly. We never did like the European style of city living, with millions crammed into high rise city apartments, with gas prices so high that only the wealthy could afford a personal vehicle. But now it appears the Powers That Be are forcing that urban lifestyle upon us: mass transportation, high density urban dwellings, water rationing, zero-scape yards, and runaway inflation. We have a duty to both resist and adapt. This week, I’ll give some practical tips on how to adapt to avoid some of the pain.

First, let’s look at the big picture on the economy and how fuel costs are affecting everything. Obviously, anything in the economy that must be transported is rising in price to reflect the cost of shipping. Every business that can is passing along their higher fuel prices to the consumers–plus a little extra. When prices become unstable or rise too rapidly, consumers lose their ability to judge what is fair. A lot of wholesalers and retailers are taking advantage of that by increasing prices more than necessary. The result is going to be galloping inflation on many fronts, not just gasoline.

Business Week put out a warning this week that defaults on loans and credit cards are not stabilizing. Rather, the crisis is deepening. I think the fuel cost component in people’s budget is causing many people who are living on the margin of solvency to default on payments. A lot of that default is showing up on credit cards as people charge their fuel purchases and then can’t pay off the mounting debt.

Ben Steverman reports that, “Nobody was expecting an easy year for U.S. banks, but many observers thought the bulk of the industry’s credit troubles would come in the first quarter. Now, it seems the rest of the year may be even worse. Case in point: A May 28 announcement from KeyCorp (Key Bank). Mounting loan losses at the regional bank company suggest the banking industry’s troubles with bad loans are just beginning. The main culprit is the bank’s portfolio of loans to residential homebuilders, KeyCorp said in a Securities & Exchange Commission filing. Losses have also increased on education loans and home-improvement loans.”

There are also a lot of businesses that cannot simply adapt by raising their own prices quickly enough to keep pace with fuel costs. Take the airlines, for example. There is a lot of competition out there, and in an atmosphere of rising fuel costs, the airlines are looking for ways to raise revenue without raising fares (directly). One of the first big enticements to boost market share was the promotion of frequent flyer miles. All airlines have oversold this benefit such that now you can hardly find one of the limited “free seats” even if you have thousands of frequent flyer miles. Delta and others played fast and loose with the fine print. Technically, you could get a free trip with as little as 25,000 miles per ticket–but there were so few of those seats available that everyone was essentially locked out by lack of availability. Then Delta tells you that, if you were willing to turn in 50,000 of your air miles for a seat you might get a seat. Thus, in effect, they just eliminated half of your miles. This whole racket is a Ponzi scheme. They’d go bankrupt if all the frequent flyers redeemed their accrued free miles. So, I don’t play this game anymore. I don’t use credit cards that offer free miles. I only use cards that offer a 1% cash back, and use the cash to shop the internet for the cheap flights (which are no longer so cheap). If you fly for business and get the free miles anyway, don’t save them up. Use them up in any way you can, as soon as you can. Someday, the airlines won’t be able to honor them.

Rising fares are inevitable, but no airline can afford to get out there ahead of the others in price. To raise fares would put them out in front as a “high priced” airline which could be deadly to business. To lose market share is fatal when you have many competitors and are billions in debt. What the airlines do is raise fares for selected unadvertised markets, like business travelers who typically book flights on short notice, and get stuck with high prices. For the price conscious occasional traveler, airlines keep offering the cheap fares, but only for booking in advance and flying during midweek when demand is lower. Watch out for the increased fees when you try and change these tickets. That’s why the airlines long ago stopped making tickets non-transferrable–so those that couldn’t make a flight would not have any recourse. It wasn’t a security problem, just a way to make a certain percentage of tickets worthless. Using a different tactic, American Airlines started charging for checking even the first bag. So far other carriers haven’t followed suit and American is suffering from the perception of being a leader in higher pricing, which they can little afford. We’re going to see more and more shake outs as airlines continue to merge or go bankrupt. Six went belly up last month. But even the mega mergers like Delta and Northwest don’t offer much economy of scale anymore–especially when there are so many union fiefdoms to protect in each airline.

Trucking has been hit especially hard by the excessive rise in diesel prices. A lot of independent truckers get their hauls through brokers and are being squeezed by rigid freight contracts which cannot be adjusted upward as fast as diesel prices. When fuel costs eat deeply into profits, many can’t make their truck mortgage payments and go bust. The auto industry is particularly in a bind. It takes years to develop new vehicles. While all the manufacturers have a few small economy cars in their lineup, including hybrids, these vehicles have never constituted a large percentage of sales or profits. Pickup trucks have been the profit leaders for car companies for years. Now those days are gone, and companies have excess factory capacity and inventory, which can’t be easily changed. The demand for heavy hauling vehicles will always be there. Certain people still need heavy hauling vehicles for business or towing trailers. But a lot of people bought pickups for recreational or occasional use. These are the buyers (almost half) that are looking for other alternatives. Tip: put a trailer hitch on your car and use a light trailer for occasional hauling rather than a pickup.

Ford was just beginning to turn around its losing business when high fuel prices killed its high profit truck and SUV sales. Now it will be forced to lay off 12,000 salaried personnel to stave off more red ink. Even Toyota had been gearing up for years with bigger and bigger trucks, which isn’t profitable any more. Fortunately, they are the hybrid leaders and are selling the Prius as fast as they can make them.

Will low prices ever return? I don’t think so, though people are suckers for thinking they are getting a good deal if price come down from $ to $3. George Soros warned this week that the oil bubble, built upon a new base of significant speculation, could burst. But, he says, that “wouldn’t burst until both the US and British economies slipped into recession, after which oil prices could fall dramatically… You can also anticipate that the bubble will eventually correct, but that is unlikely to happen before the recession actually reduces the demand. The rise in the price of oil and food is going to weigh and aggravate the recession.” I think there will be a correction since speculators can’t keep bidding up the price indefinitely. But I think the retreat in price will only be temporary.

Long-term, as transportation costs become very expensive I see the economic model of far away production coupled with cheap shipping diminishing in favor of more local production. It will take a while for that pendulum to swing back in this direction, but with increasing instability in the world, it is inevitable. Ultimately, the world will be better off with a better balance in national and regional self-sufficiency rather than going for the world-wide low price only. Just-in-time inventories, as another example, are certainly more efficient than keeping large inventories, but utterly useless in a crisis when only stockpiling in advance will save a company. Keep that in mind if you own a business that has a fragile supply line.

SOME PRACTICAL SUGGESTIONS

Cars and trucks: Take stock of what you own right now. If you have any gas guzzling cars or trucks that you are making payments on, consider selling them now. Bad as the market is for used vehicles with poor gas mileage, it’s not going to get better, so try to sell now. Keep in mind that there are people out there who still need cars or trucks with power and good towing capacity. If your vehicle qualifies, consider installing a heavy duty trailer hitch so you can target the towing or construction market.

If you have older vehicles that aren’t fuel efficient but are paid for, they may not have much market value, so you’ll have to consider the trade off in keeping them around (and using them only when needed) vs. selling. Even at today’s fuel prices, it takes several years to see any economic gains from buying a new vehicle compared to the reduced expense of keeping an older vehicle that you own outright. The down side of that strategy are the costs for keeping it maintained, insured (remove collision and comprehensive but always keep liability and uninsured motorist insurance), and finding a place to park it. Learning to do your own maintenance is highly recommended to save costs on older vehicles.

If you are stuck with a non-fuel efficient vehicle, here are some things to consider: All of these vehicles were designed to put out more power than they need for cruising down the highway. That excess power can be put to use by adding an after-market overdrive unit to your transmission or changing the top gear to a higher gear ratio. Gear Vendors, Inc is the largest manufacture of overdrive units. There are many dealers around the nation. Do an internet search for “overdrive units.”

Even high efficiency cars can benefit from higher final gear ratios. Many specialty automotive shops have access to higher gears for VW diesels, Hondas and Toyotas. Typically, you can increase your mileage by 10-20% with a higher final gear ratio. These are not add-ons to your transmissions like overdrive units, but replace the actual gear ratio inside a manual transmission. If you have an automatic transmission, you’ll need an overdrive unit. Auto performance shops also sell aftermarket performance-enhancing ignition computers that can be programmed for higher mileage.

Here are two other big tips for getting much better mileage on the highway if you have to stay with your non-fuel efficient vehicle. Most of the drag on the car comes from 2 sources: wind resistance and engine/drive train friction. Take note of this next time you drive. If you are driving along the highway with a downward incline, take your car out of gear and let it coast. Most cars, depending on the slope will only slow down very gradually, demonstrating that most of your fuel is being used just to keep your engine up to speed with the coasting. If you are following a truck or big SUV within a safe distance (2-3 car lengths) when you begin to coast, the wind resistance is reduced so much that you will sometimes gain on the vehicle in front. Coasting out of gear may be technically illegal in some states but it is quite safe as long as you keep alert to any closure with the vehicle in front. When you coast down a hill rather than keep your car and engine engaged, you mileage will increase to over 100 mpg gallon for that portion. In fact, using this coasting technique, a driver can actually get better mileage in mountainous terrain than driving across flat land at highway speeds. That’s because it takes a less extra gas to take your car up the hill compared to the amount of gas saved coasting down the other side. Test it yourself.

Driving on flat land takes a different technique to save fuel. The best mileage on flat land is obtained either by slowing down to agonizing 45-55 miles per hour (mostly reducing wind friction) or by following larger vehicles within 2-3 car lengths (called “drafting”) and taking advantage of the suction zone behind them. Technically, you get the full benefit of this drafting vacuum only by following within one car length. That’s what professional drivers do on the racing circuit. But that is dangerous, irritating to the driver ahead of you and often illegal. You can still get 80% of the draft effect by staying at a safer 2-3 car length distance. In addition, the more vehicles you follow in a row, the better the overall drafting result as air is accelerated forward with each passing vehicle.

Caution: Do not use this in bad weather or when road conditions are poor. This technique is also not for drivers who have slow reactions. It is also a bit more stressful to drive like this as your eyes have to stay more focused on the vehicle in front to be alert for any sudden stop. Most people I know who use drafting prefer to follow larger trucks since they don’t slow down as fast as a car and give more time to react in braking. Is it worth it? I’ve seen highway mileage go up by 30% so on a long trip the savings can be significant. Drafting another vehicle is much more effective than slowing down, but you must do this very carefully.

New cars: For those of you who have the funds to buy a new fuel efficient vehicle, a new breed of super efficient cars is now entering the market. Trade in your current vehicle and let the dealer worry about marketing it to others. Despite all the positive hype, I still do not recommend getting a hybrid car, unless you have the money to do the standard American thing: Buy new and trade in on another car before the warranty is up. These are very complex vehicles, and are not suitable for do-it-yourself maintenance after the warranty period. They work very well when they work, and so far the maintenance history is very good, but keep in mind that if you buy a used one, you will certainly have to pay in excess of $10,000 for a new battery pack at some time in the future. The one main reason why Toyota has resisted allowing the Prius to run only on its battery (turning it into a plug-in electric vehicle) is that the life of the battery pack diminishes rapidly with deep cycle use. They keep it going throughout the warranty period by forcing the engine to recharge the battery pack every time it gets below 80-90% capacity.

Someday, however, we will have a major crisis of war and destruction that will not permit you to trade in your overly-complex hybrid for a more maintainable car. You’ll be stuck with what you have. So from a survival perspective I still recommend you buy one of the new super high mileage diesels. The common-rail diesel technology has beat out all the competition and represents the current pinnacle of diesel fuel efficiency. All the major foreign car companies are now producing a common rail diesel engine option–for Japan and Europe, but few are importing them to America. That is changing now. Here’s the latest lineup of cars destined for the US later this year or in 2009 (from Wikipedia.com)

BMW‘s D-engines (also used in the Land Rover Freelander TD4),

Mercedes (Daimler’s) CDI (and on Chrysler’s Jeep vehicles simply as CRD),

Ford Motor Company’s TDCi Duratorq and Powerstroke,

General Motors Opel/Vauxhall CDTi (manufactured by Fiat and GM Daewoo) and DTi (Isuzu) Daewoo/Chevrolet VCDi (licensed from VM Motori; also branded as Ecotec CDTi)

Honda‘s i-CTDi

Hyundai-Kia‘s CRDi

Mazda‘s CiTD

Mitsubishi‘s DI-D

Nissan‘s dCi

Subaru‘s Legacy TD (as of Jan 2008)

Toyota‘s D-4D

Volkswagen/Audi: The 4.2 TDI (V8) and the latest 2.7 and 3.0 TDI (V6) engines featured on current Audi models use common rail, as opposed to the earlier unit injector engines. The 2.0 TDI in the VW Tiguan SUV uses common-rail, as does the 2008 model Audi A4. VW has announced that the 2.0 TDI (common-rail) engine will be available for VW Passat as well as the 2009 Jetta. [Only the Jetta will come with a manual transmission, however]

Volvo D5-engines are common rail diesels.

Diesel is the current wave of the future. The extra efficiency of the diesel engine technology easily overcomes the current premium you pay for diesel fuel-which will come back down on par with gasoline sometime in the future. Unfortunately, many of these auto manufacturers are offering diesel engines only with automatic transmissions. For best mileage, performance and versatility, always choose a manual transmission. Automatic transmission have slippage built into the torque converter at low speeds to aid in smooth shifting. The big savings, however, doesn’t come from just evading slippage, but in being able to shift at lower RPMs than an automatic does. I can get near highway mileage in town by accelerating very slowly (not exceeding 1800-2000 RPM) by shifting up to the next gear earlier than normal. You can do this without lugging the engine (harmfully) as long as you accelerate slowly and don’t put much pressure on the engine. Don’t accelerate too slowly as you want to avoid spending too much time at the higher RPM shift point. When in 5th gear I can roll along at 40 mph in town and be getting over 30 mpg.

Another benefit of having a manual transmission, is that you can always pop-start a car if your battery runs low–just roll the car down a slight incline and engage the clutch in 2nd gear with the ignition on. I use this feature at least once every year it seems–saving myself an expensive tow.

Electric vehicles have a great deal of promise, but the battery technology is still currently too expensive to allow the electric vehicle to come down in price for ordinary consumers. If we have enough time for the technology to mature (a big if, given the wars looming in the future), I’m guardedly optimistic that this will become a reality. So, we’ll be careful not to overstock on conventional technology which could quickly become obsolete.

A note on fuel storage: Fuel storage is important not only to guard against shortages in supply or long lines at the pump, but to ensure that you have enough reserve fuel to get out of town to a retreat when needed. Diesel is the best fuel to store. It can last for decades underground, whereas gasoline goes bad within a year or two (you can still use it when old if you mix it with fresh gas, but it needs octane and anti-gum additives to help it run right). There are storage additives for both fuel types (see http://www.joelskousen.com/Secure/recommended.html for a listing of products from the appendix of The Secure Home –my magnum opus on preparedness, security and self-sufficiency). Even with the problems of storing gasoline, you need to store the type of fuel you use. As a minimum you ought to keep at least a few empty barrels around so you have the capacity to buy more when prices dip lower (if they do). I’m still driving on $2/gal gas that I purchased last year when prices dipped briefly. There are small 30 gallon barrels available in PVC plastic that are safe for fuel and easier to load and unload than the 55 gallon drums. But, you can get 4 gallon plastic gas jugs anywhere. A hand truck is helpful to move around the barrels. If you store fuel around your home, keep it in a separate shed. If all you have is a garage for storage, keep the fuel containers near the garage door on a rolling dolly so you can remove them from the garage quickly in case of fire. Housing and Lifestyle changes: As many of you know from my book Strategic Relocation, I am very much in favor of establishing a rural life or at least a rural retreat for times of crisis when social unrest will overwhelm the major metropolitan areas. This will be especially important in an epidemic where you need to isolate yourself and family far away from high density population centers. That ideal hasn’t changed, but what has changed is the severe price you will have to pay to keep a primary residence in a rural area right now if you have to commute into the city for a job. That is why I spent so much time outline contingency planning in the book–because so few are in a position to live full time in an ideal area. Even the ideal rural place has major compromises in terms of distance to the amenities only offered in major metropolitan areas-and the cost of getting there.

More and more, the cost of fuel is going to require that you find a job or position that allows you to work from home at least a portion of the time, or find a cheap place in town to live during the work week where you don’t have to commute very far. The best situation would allow you to live close to work during the good times and have a well-prepared retreat in a rural area for the times when you need to leave the city, even temporarily. That presupposes, of course, that you prepare carefully your transportation and security options to get to your retreat when you need it. Ultimately, you will need a retreat large enough to have a place where you can grow your own food. This can be done (with high intensity gardening) on a half acre to an acre of good quality land. It is best if you practice gardening skills before your life depends on it. But if you can’t due to work pressures or lack of space, do stockpile the tools, the books and the heritage (non-hybrid) seeds to ensure you can start the process when needed.

Summary: There are a lot of threats out there as the world deteriorates and as evil men conspire to create conflict to take away our liberty. We can’t do a lot about the really big threats that are beyond our control, but we can prepare to survive them and build a network of like minded people to assist us. That’s one of the main reasons why I put out this weekly news analysis–to build the movement and help people see far enough in advance of what is coming to prepare for it.

But preparedness is not cheap and self-sufficiency is darn right expensive. More than one of my clients has had to come back to the city because they ran out of money trying to live off of their savings in a rural paradise–where they had no work. Most of us are going to have to stay in the job market most of our lives in order to survive financially–inflation is going to take its toll on each of us. So, be prepared to start cutting back now to economize while you learn to adapt. Here are 10 basic suggestions for adapting to our deteriorating economic situation:

1. As an inflation hedge, try to secure work where one can more easily increase salary or income to keep pace with inflation. If you have rental income, negotiate an inflation clause (I recommend 1.5 times the annual CPI as a minimum).

2. Prepare for alternative skills that will be useful in a crisis of shortages and unrest (repairing existing technology is always a good bet–both mechanic and electronic skills are needed.)

3. Prepare for an alternative profession if yours is one that is subject to fragile financial markets (mortgage brokers found this out too late, and were suddenly without a viable market).

4. With commuting costs now rivaling monthly rental costs in some areas, consider moving closer to work if it will reduce those costs. Under some conditions it could even pay for a small apartment and leave you free to still keep your house in the suburbs or the country as a retreat.

5. Buy a fuel efficient vehicle, even if small, and use it for most of your commuting or running around. If you can’t afford the new ones, good deals can still be had on older VW diesels (TDI)-1996 and newer. These engines last a lot longer than gasoline engines and can be overhauled for less than a couple of thousand. They can get between 40 and 50 mpg.

6. Consider riding a bicycle for short trips. The fuel savings will add up. It’s great for your health and surprisingly comfortable with the variety of mountain bikes available.

7. Start eating more basic foods (wheat, rice, and beans) that provide lots of energy for very little money. You can cut your food bill in half by not buying prepared foods at the grocery store (nor eating out so often).

8. If you are heating with oil or propane (which have tripled in price) get a new furnace system this summer before the winter rush. Consider the new ground source heat pumps. They are more costly to install but can save money in the long term. Electricity is relatively cheap now compared to other energy sources.

9. Add a solar water heating system. They save money in most climates. I have a water jacket on my wood stove that takes over in the winter when the solar doesn’t produce enough heat to preheat the water.

10. Add a high efficiency wood stove to your home. It will save on energy even if you don’t run it all the time. Best of all, it will provide you emergency backup heat during a winter power outage.

This has been a slow week for substantive news stories. I hope you’ve enjoyed this break in my normal commentary to concentrate on some things you can put into practice right now. [END]

Related:

Joel Skousen is a regular guest on Dr. Stanley Monteith’s Radio Liberty. On last Thursday’s first hour broadcast—05/29/08 at Dr. Stan’s audio archives—Joel discusses this and other issues for the hour.

105 Driving Tips for Better Gas Mileage

All of my Joel Skousen posts

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