by Ben Perreira
Have you ever gone out of your way to go to a cheaper gas station? This one is for you.
My friend and I just got back from a cross-country road trip. We filled our tank about 10 times and drove over 3400 miles. That’s a lot of fuel. It also gave us a lot of time to think about rationality and gas prices (which, by the way, are $0.75-$1.00 cheaper outside of California).
Most of us fill up on regular schedules. We work X miles away and drive round trip to work 5 times per week. Our extracurricular activities tend to fall on the same days each week and month. Aside from a few outlier weeks (like mine two weeks ago), our fuel consumption is fairly steady.
Economists call consumption (or demand) like this “inelastic” in the short term. It is unlikely to vary significantly week-to-week. Demand for fuel is more elastic in the long term because consistently higher prices may cause us to buy more fuel-efficient cars, seek alternative means of transportation, move closer to work, or change jobs altogether, all of which with the goal and presumptive effect of reducing consumption.
Now back to those of us who seek out cheaper gas. This map from GasBuddy.com shows the price of regular gas at all gas stations within about a 3-mile radius of my house over the past 48 hours. The range is $3.97 to $4.99, although most prices are in the $4.15 to $4.40 range.
Imagine you live in the top left corner and you work in the bottom right corner of this map. That would take you about 25 minutes in typical LA morning traffic. You need gas tomorrow before work. Where do you stop for gas?
You live pretty close to a $4.25 station and will pass two stations that sell gas for just under $4.00. Your gas tank holds 16 gallons and you need 13 gallons to fill up. By seeking out the $3.97/ gallon station you will save $3.64 (13 x $0.28) or 6.5% off $55.25 that a fill-up would cost you at the $4.25/ gallon station. That would save you $182 per year (I multiplied by 50 to account for vacation weeks). No bad, but worth it? If it’s at all out of the way, it’s probably not worth the time.
The coffee you stopped for on the walk to your car cost you almost that much, and because you probably only fill up once per week versus daily for the coffee, the coffee is a 5x more costly expense.
So you need gas tomorrow morning before work. Where do you stop for gas?
At the station that is easiest to get in and out of. That’s more valuable than your savings of $3.64.
Rather than spending time trying to save a few bucks a week, making one’s morning coffee at home could save $500 per year (at $1 per cup vs. $3 per cup five times per week for 50 weeks).
It is important to note that people will always seek out cheaper gas even knowing that, when accounting for time and using extra fuel to drive out of one’s way, it is an irrational decision. Sure, it may save you a little money, but so would not having utilities at your house. Most Americans wouldn’t consider that a rational financial decision.
However, in the case of gas prices, in irrationality can come peace of mind: “This is just how I do it.” The satisfaction we get from being savvy shoppers is much more difficult to quantify than the simple model I used to make my gas purchase decisions. In these kinds of irrational rituals are opportunities for marketers to speak our language, because if it weren’t for a little irrationality in how we purchase, most marketers would be looking for new jobs.