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3 Reasons Why Americans Should Be Cautious of $2 Gas Prices

02/20/2015 05:18 pm ET | Updated Apr 22, 2015
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I must say, filling up my 20 gallon gas tank for $35 instead of $65 feels kind of nice. I know I'm not alone in feeling the price ease -- Twitter, Facebook and Instagram have been inundated with #GasPrices photos.

Regardless of the gas price burden being lifted, the economist in me is going crazy. Low gas prices could result in some unintended and painful consequences. My advice? Be optimistically cautious.

Over the last few months, I have been perplexed at the speed in which oil prices have shot through the floor. Barrels are transacting as low as $46. Though everyone, including myself, is enjoying the extra spending money, gas price reduction should be considered with caution. Here are three reasons why the low gas prices are not all they're cracked up to be:

1. Gasoline "Savings" Is a Myth

A few years ago I watched a fascinating PBS documentary titled Mind over Money. In the documentary, NOVA presented a very telling experiment exposing the irrational human behavior around money decisions (pbs.com).

In this special, several couples were interviewed and asked the following question: "If you were given the choice to receive $100 in one year or $102 in one year and one day, which option would you take?" The blanket response amongst those interviewed, was they would wait the extra day for the $2.

The same couples were then presented with the same scenario, but with a simple change in time period. They were asked, "Would you take $100 today or $102 tomorrow?" The response shifted 180 degrees. Everyone answered "yes" to taking the $100 immediately.

According to the documentary, the rational choice in both scenarios would have been to wait for the extra money. However, the second scenario illustrates an individual's logic being clouded with what behavioral economists call, present-bias (making an incorrect choice that your future self would have preferred to not make).

Like the experiment on NOVA, the gasoline "savings" euphoria is due to people's present-bias. For example, the so-called gas savings that is underway is based on a projected annual savings of about $500 per year for the average family if they purchased the same amount of gasoline (US Energy Information Administration, EIA.com).

However, data from Cardlytics show that consumption of gasoline by the average American has risen six percent, in addition to an overall increase in spending at about four percent (cnbc.com). Although, Cardlytics states that the average savings per person, per month is $18, the same report also included the surprising spike in other consumer spending by $45 per month.

The $500 per year in gas savings becomes obsolete, considering consumer spending in restaurant and retail categories is on the rise. In reality, if Americans are spending $45 more per month, instead of saving $500 per year, they're actually spending $540 per year! This is present-bias proof of the emotional mind trumping the logical mind when it comes to money.

2. Green Tech Innovation Halted

Instead of building more green technology, like fuel-efficient automobiles, low gas prices are causing the making of hybrid and electric vehicles to decrease. At one time, the purchase of popular vehicles like the Prius, Ford C-Max and the Honda Civic Hybrid were the highest sold vehicles in states like California. Since gas prices have dropped, those car companies have been hit with a double digit decrease in sales.

Americans are justifying the purchase of gas guzzlers because gas is now less expensive. Professor of energy economics, Chris Knittel, told the L.A. Times, "People are less likely to adopt more fuel-efficient vehicles, and companies have less incentive to invest in new technologies." (LATimes.com)

3. The Tax Still Man Cometh

According to the U.S. Energy Information Administration, ¢42.52 is the average tax per gallon of gas (which includes federal tax of ¢18.4 and state tax of ¢24.12). (EIA.gov)

Since gas prices have plummeted, the federal government and several states have jumped on the opportunity to raise their respective per gallon tax. Senator Corker (R, Tennessee) has proposed a ¢12 per gallon hike from the ¢18.4 -- that is over a 65 percent increase (Washingtonpost.com). Many other states like, North Carolina, Utah, Michigan and Wisconsin, are looking to increase the per gallon tax anywhere from ¢.05 to ¢.20.

Though falling gas prices are affording Americans some financial breathing room, the dramatic drop is in no way an indication that we are approaching utopia. To stay ahead of the curve and keep yourself financially free from swift economic turns, I suggest spending with an alert fiscal conscience. Taxes and inflation already rob the majority of us of our hard-earned money, let's not allow the mask of low gas prices do the same.