Plan for expensive fuel
Does your budget include a contingency for fuel to get much more expensive? Because it ought to.
I learned about the need for contingencies early. My first attempt at setting up housekeeping took place in 1980-1981, right at the peak of an inflationary spurt that saw the consumer price index grow at 14%. My budget was completely destroyed by prices that went up by more than 1% per month.
So what's your contingency for a spike in fuel prices?
For a few people who live in cities and walk or take mass transit, fuel is a small percentage of the total spending--small enough that a even a big increase in fuel prices won't break the budget. If you're not one of those people, you should either have a plan to take money from somewhere else in the budget, or else you should have a plan to reduce your driving if necessary.
What other line item can you take money from? Discretionary money--entertainment and the like--has usually already been cut to the bone in the initial budget-making process, so there's not much money to take from there. The closest thing most people have in their budget for contingencies is the money that's going into savings--and taking the money from there is a terrible idea.
That leaves reducing driving. Reducing driving in the short term is hard, but there are ways:
- combining trips--always a good idea anyway
- carpooling and other forms of ride sharing
- bicycling or walking
- using mass transit
In the longer term there's the opportunity to take more drastic action, such as moving closer to work or making investments in fuel economy, such as a more efficient car. (A moped, scooter, or motorcycle would be cheaper than any new car and much more fuel-efficient as well.)
When making your contingency plan, remember that transportation fuel is not the only kind you need to pay for. Heating and electricity rates will go up right along with transportation fuel costs.
This means that another part of your contingency plan should be energy-saving measures you can take at home: better insulation, adjusting the thermostat, etc. Even better, make the changes now and put the savings into a contingency fund.
Also, don't forget that fuel price increases tend to drive price increases in everything else as well, starting with food.
I'm making a big deal out of this because higher fuel prices are in the cards. Fuel prices will go down as well as up, but the long-term trend will be up. According to the US Energy Information Administration, only three out of the top ten oil producing countries showed increases in production in 2006 over 2005. None of them showed significant increases and the two biggest (Saudi Arabia and Russia) both showed clear declines. In fact, total world production of oil has been flat since 2004.
Just as important as flat production is increases in consumption, especially in oil-producing countries. In part because of increasing domestic use, only two of the top ten oil exporting countries showed an increase in exports in 2006 over 2005.
We will no doubt continue to increase production of renewable fuels like ethanol and biodiesel, but it's an open question how much of the gap between flat supplies and growing demand can be filled by renewables. Your contingency plan is for the very real possiblity that any gap will push up fuel prices.
As I said, fuel prices will go down as well as up. There's a lot of low-hanging fruit in the US for conserving fuel. When prices get high enough, people will make the necessary changes, and many of those changes (moving closer to work, buying a more fuel-efficient car) will produce long-term reductions in demand--reductions that won't be quickly reversed, even if fuel prices drop. And, sometimes, that reduction in demand will be enough to produce a real drop in prices, but those drops in price won't come when you need them to save your budget. They'll come when you've finally given in and adjusted your fuel use to the new reality.
How will you handle higher fuel prices? You need to have a plan.