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Propserity at $3 per Gallon

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Tue, 2008-03-25 11:09 — The Conductor
Topic: 
Economics
Places: 
U.S.A.

Here's one possible reason for the observed minimal effect of $3/gallon gasoline on our standard of living:

"As you have probably seen on TV and elsewhere, in September 2006, Wal-Mart launched its $4 prescription program. Now, 18 months later, it reports that it has saved consumers over $1 billion (yes, billion) as a result of that program. That's $1 billion that poorer consumers have to spend elsewhere on the things they need (or that is reducing insurance costs and premiums), not to mention they can now buy prescriptions they might not have been able to afford before or not have to cut pills in half to save money. Moreover, that program prompted Wal-Mart's competition to create similar programs, the benefits of which can be placed on top of that $1 billion. For some strange reason, the major media didn't cover this story when Wal-Mart's press release went out last Friday."

Wal-Mart saves us (and the poor, more so!) a billion dollars on one commodity with inelastic demand. If my prescription drug cost drops $50/month, I can still afford the same quantity of gasoline that month, even at the higher price.

Let's do the math. If one drives 1500 miles per month (18,000 per year--a lot?) in an average 25mpg vehicle, one uses 60 gallons of fuel per month (1500 ÷ 25 = 60).

In August, 2001, gasoline was around $1.90. In August, 2006, gasoline was (guessing) around $2.30. Now fuel is around $3. The difference in price between 2006 and now is about 70 cents per gallon. Using 60 gallons per month costs an extra $42 (60 x .70 = 42).

If one had just a single $50 prescription eligible for the Wal-Mart plan, it saves $46 per month (50 minus 4 = 46). Combining the fuel increase with the prescription decrease, one would have $4 MORE to spend every month (46 saved on drugs, minus 42 spent on fuel = 4). What's everyone on the news whining about? Why do they insist Wal-Mart is *evil*?

Yes, I know, it is a simple model. But my assumptions are generous to the opposing viewpoint. And this phenomenom cannot be rare or isolated. A billion dollars in savings implies a huge number of participants.