You’d better be hedging

Some fairly respectable analysts are beginning to join “kooks” like Kunstler, although in a far less inflammatory way, in predicting that high oil prices are not only here to stay, but likely to get quite higher. The latest “Occasional Report” from CIBC World Markets lays out the case. Older “Occasional Reports” are also highly recommended, as they seem to cut through a lot of baloney and show how and where higher energy costs will hurt (without going flat-out lunatic like the idiots who think every N% increase in gas prices means an N% increase n the price of everything delivered by truck, for instance).

I’ve been hedging higher energy prices for a long time now – we paid a hefty premium for our house in central Austin, and part of the reason was that we could, much more easily than your average suburbanite anyways, drastically reduce our driving and/or switch to jobs better served by public transportation. (my current office is served about as well as any out here in the ‘burbs, which is to say that I can take the bus each day by spending only about 40 extra minutes – as sad as that is, it makes me the winner here by far). We also bought a Prius in February of 2004 (after waiting five months) – again, a hedge; if we do end up having to drive a lot, at least it won’t kill us. Well, as it turns out, we’re only driving about 10,000 miles a year combined anyways, but every little bit helps.

The only problem is that hedges like this are largely a loss-amelioration strategy – they don’t gain us anything unless inflation makes wages go up. The same group above thinks it won’t this time, unlike in the 1970s, so the best we’re really able to do is attempt to be a bit less screwed than the average suburbanite will be.

This hedging logic (whether you believe in local kook Roger Baker’s Kunstler-like rants or not) should also apply to public infrastructure spending. I happen to believe that building the toll roads is a way to do this – the ‘hedge’ being that since the roads are going to be built either way (an assertion the environmentalists disgree with), it’s better to have them paid back with tolls rather than with property and gas taxes (even if the tolls come up short, the impact on central-city residents is still less than with the typical free highway payment mechanism – remember, you still pay gas taxes while driving around central Austin, but none of that money goes to those roads – in fact, urban areas all over the country are screwed by the gas tax’s bias towards suburban and particularly exurban areas). In other words, paying for the new toll roads with gas taxes simply makes things better for people at the far edges of Leander, and far worse for people living in Central Austin.

A better hedge, of course, would be a gradual overall increase in gasoline taxes with a mandatory minimum payback for major urban areas similar to what the Feds do with ‘donor states’. But with the average suburbanite convinced that they’re undertaxed rather than subsidized, it’s simply never going to happen. Toll roads are, in this sense, the best hedge we can manage at this point in time.

For those interested – ways to hedge on energy costs which are easier if you live in an urban neighborhood than out in one of the soulless sprawlburbs:

  • I can bike to work (up to 5 days a week) – right now I average once a week; mainly due to scheduling difficulties, but we could change this if we had to.
  • I can take the bus to work – at a 40 minute or so penalty per day (which as mentioned above puts me ahead of pretty much anybody else here)
  • I can get a job downtown (easier said than done) and reduce the transit penalty to near-zero
  • We’re within a (long) walk of 5 grocery stores – right now this means we have a very short drive; we only occasionally walk, but at least we CAN walk if it becomes expensive enough to drive
  • We can walk to a battery of other shopping and dining choices (we do this quite frequently now)
  • In an era of higher fuel prices, the places we shop are going to be less impacted than the strip-mall businesses, due to efficiencies of scale (cheaper to deliver to 5 grocery stores that are very close together than 5 that are very far apart)
  • Our house is small – less air conditioning and heating costs
  • Our house is old enough that it was designed before air conditioning – meaning we have enough windows for good ventilation most of the year

For these hedge privileges, however, we pay through the nose:

  • The house price is far higher, per square foot, than in the ‘burbs — this is not purely because of location, but also because post-WWII zoning laws have artificially restricted the supply of walkable urban neighborhoods. Most of the homes on our street are illegal under current zoning code for various bogus reasons.
  • Our city, county, and schools tax mainly through property taxes, which are a double whammy – not only are we appraised proportionally higher, but the property tax itself is often used in ways which subsidize suburban development – providing city services is far more expensive per acre in Anderson Mill than it is in Central Austin, but the Central Austinites pay orders of magnitude more property taxes.
  • Those property (and also sales) taxes are often grabbed by the state and spent in ways which not only subsidize the suburbs, but hurt central cities – things like requiring local ‘donations’ in order to expand freeways. (The 1998 and 2000 bond elections floated tens of millions of dollars in bonds which were used to pay for right-of-way and other costs for roads like the far north extension of Mopac, SH45, SH130, etc – none of which provide any use for central Austin at all, yet central Austin is where most of that tax money comes from – and when a project IS proposed which affects central Austin, it ends up being a destructive force like the ridiculous proposal by TXDOT to double-deck Mopac).

Transportation microeconomics 101

Reformatted in August 2012 to fix some dead links and make it look slightly nicer. Keep in mind this was written back in 2005; I have changed no content beyond this first paragraph.

I talk about this enough that it might should be its own category.
Problem: Bozoes in government, in the media and elsewhere think about transportation at only the highest level – where you’re moving thousands of people around the city. This usually ends up producing plans which fail spectacularly at serving their intended constituents. Since this often boils down to money, I’ll call this “transportation macroeconomics” even though most of the people who do it aren’t thinking about economics. (Hint: they should be).

Solution: Transportation microeconomics. Whenever evaluating some transportation plan or change in economic conditions, take a couple of representative ‘use-cases’ and analyze the economics of their decision-making at their local (individual) level.

Example 1: Toll Roads. Local activist Roger Baker has been on my case on the austin-bikes email list for talking favorably about toll roads (as the least noxious of the two realistic possible outcomes – the other one being that all of those toll roads are built anyways, but as free roads). I’m going to be more favorable to him than he is to me, and construct an argument based on his stated motivations (he likes to accuse me of being a toll-loving road warrior). Roger’s point is, basically, that the toll roads won’t have enough traffic to pay off the bonds once the “oil peak” causes gasoline to get even more expensive than it is now. He’s definitely one of the SOS-bloc (don’t build these roads at all because they promote sprawl and hurt the aquifer) rather than the free-roads-bloc (“double taxation!”) best exemplified by Brewster McCracken and Gerald Daugherty, who will end up getting central Austin to pay for these roads via property and sales tax kick-ins.

So, is Roger right? Would expensive gasoline lead to an exodus from the suburbs and a default on the bonds which back the toll roads? Or am I right – that the traffic which today would fill the toll roads in a second isn’t going anywhere even as gasoline gets more expensive. Let’s look at a use-case.

Joe Suburban drives his Suburban on a 30-mile round-trip every day from western Travis County to his job in one of the southern suburban office parks. He gets roughly 15 mpg on this commute and pays $2.00/gallon for gas today. By some calculations, which include depreciation, he pays a hefty price for his commute even today, but I categorically reject the idea that suburbanites will reduce the number of vehicles they own (barring catastrophically high gas prices), so depreciation should not honestly be part of the cost equation. Using my handy depreciation-free cost estimator, Joe’s daily commute cost is $2.79 today (remember, no tolls yet). Is that enough to convince Joe to carpool? Not today it isn’t. Is it enough to convince him to use transit? Even at the discounted rate, the bus trip from the park-and-ride at 290/71 costs him probably an hour extra time per day, and still a buck ($1.79 savings at the cost of an hour). This assumes he even HAS a transit option, of course. Most suburbanites don’t.
Suppose gasoline DOUBLES in price – to $4.00 a gallon. Joe’s daily commute cost (with new tolls of, let’s say, $1.50/day) is now: $6.91/day. His “transit cost” is now $5.91 for an hour of time, assuming no rise in bus fares (unlikely). Still not very attractive, I hate to say.

All right, suppose gasoline TRIPLES in price – to $6.00 a gallon. Joe’s cost is $9.58/day. Transit option would save $8.58 a day at the price of an hour. I hate to break it to you, but most suburbanites would still drive at this cost. Bad news for Roger: $6.00/gallon gas is roughly equivalent to $160/barrel (working backwards from this logic which is admittedly crude). That’s quite a bit further down the “oil peak” road than most people think we’ll hit anytime ‘soon’. In other words, it will take such huge increases in the cost of gasoline to get suburbanites to stop driving to work alone that it’s not even a factor for the foreseeable future. Even then, one would assume that rather than abandoning their stake in the ‘burbs, some large percentage of suburban drivers would just get more fuel-efficient cars. At $6.00/gallon, driving a Toyota Prius, Joe Suburban’s daily commute cost drops back to 2.48 without tolls and 3.98 with. Oops.

See my previous article on my ‘week without a car’ — even for me, who is the only guy at my 60-person office who could possibly take the bus to work without transfers, it’s not cost-and-time-effective to use transit until gasoline is really REALLY expensive. It costs me about 30 extra minutes per day and saves me pocket change.

When does transit make sense? When the time penalty is minimal and/or the cost savings are comparatively large. Two obvious (much shorter) use-cases:

  1. If I worked downtown, I could take the #5 bus straight there at a time penalty of perhaps 5 minutes. This time penalty is so small as to be not worth counting, and I could actually get rid of a car, thus moving us into the realm of the traditional commute calculators – a huge economic win for the transit alternative. Unfortunately, the current economic regime penalizes businesses who locate downtown rather than in the ‘burbs (far higher property taxes) even though they generate far less demand on city services.
  2. Lucy Leander works at the University of Texas and has to pay roughly $5/day for parking. She lives close to a park-and-ride where she can pick up a good express bus to work which isn’t much slower than her car would be. Here’s her comparison. Even at $2/gallon, she saves $7.36 a day (without getting rid of a car) and only spends a few more minutes. Note that having to pay for parking makes this comparison far more favorable for transit.

So my lesson is: Major employers should be downtown (where transit can serve them), and parking shouldn’t be free. Until either one of these is fixed, however, you’re going to get nowhere with me by claiming that a plan is economically viable (or not) based on gasoline prices.

Unfortunately, current conventional wisdom is still that spreading jobs through the suburbs reduces average driving (absolutely false). The facts have an anti-suburban bias, I guess.

Why Central Austinites Should Support Toll Roads

Excerpted from a discussion on the austin-bikes email list, where one of my self-appointed burdens is to be the voice of reason towards those who live in the center-city echo chamber (where everybody bikes; where nobody wants sprawling highways; etc).

The last paragraph of my response is the most relevant piece, and the one that the person I was responding to and many other wishful thinkers just don’t get. I, thanks to moving here with suburbanites, and working with exclusively suburbanites, have learned the following painful truths:

  • There are more suburbanites around here than urbanites. A LOT more. And the most recent election, they finally WON a seat in our city council (McCracken over Clarke) DESPITE much higher turnout in the center-city.
  • Outside Austin, there are no urbanites. CAMPO is now 2/3 suburban, for instance.
  • Suburbanites cannot conceive of any lifestyle other than the suburban one. Really. I get blank stares when I tell them I rode the bus to work today, or when I say I walked to the store.
  • The sheer population and geographical coverage of suburban neighborhoods means that even if gas gets really expensive, they’re still going to be living there. Resistance to their redevelopment in ways which aren’t so car-dependent and the cost of such modifications means we’re stuck with what we have now for at least a few more decades. Yes, even at $5.00/gallon.

Here’s the thread:

Roger Baker wrote:
> On Mar 4, 2005, at 9:34 AM, Mike Dahmus wrote:
>
>     Roger Baker wrote:
>
>         McCracken is the immediate hero here, but he likely wouldn't
>         have done it without Sal Costello, SOSA, and all the
>         independent grassroots organizing.
>
>         On CAMPO, McCracken's resolution got defeated about 2 to 1,
>         with Gerald Daugherty on the bad side, along with CAMPO
>         Director Aulick. TxDOT's Bob Daigh deserves a special bad
>         actor award for expressing his opinion just before the CAMPO
>         vote, with no reasons given, that any independent study of the
>         CAMPO plan would be likely to threaten TxDOT funding for our
>         area. -- Roger
>
>
>     Just like the transit people in Austin with Mike Krusee, you've
>     been completely snookered if you think these people are your friends.
>     The goal of McCracken et al is NOT to stop building these roads;
>     it is to build these roads quickly as FREE HIGHWAYS.
>     In other words, McCracken and Costello ___ARE___ THE ROAD LOBBY!
>     Keep that in mind, folks. Slusher and Bill Bunch don't want the
>     roads at all, but pretty much everybody else who voted against the
>     toll plan wants to build them as free roads.
>     And these highways built free is a far worse prospect for Austin
>     and especially central Austin than if they're built as toll roads,
>     in every possible respect.
>     - MD
>
>
> All that is easy for Mike to say but, as usual, lacks any factual basis or
> documentation. Furthermore, he does not appear to read what I have previously
> documented.

(my response):

As for factual basis or documentation, it should be obvious to anybody with the awareness of a three-year-old that McCracken’s playing to his suburban constituents who WANT THESE ROADS, AND WANT THEM TO BE FREE, rather than Slusher’s environmentalist constituents, who don’t want the roads at all.

As for reading what you’ve previously documented; oh, if only it were true. If only I hadn’t wasted a good month of my life reading your repeated screeds about the oil peak which have almost convinced me to go out and buy an SUV just to spite you.

POLITICAL REALITY MATTERS. The suburban voters who won McCracken his seat over Margot Clarke WANT THESE HIGHWAYS TO BE BUILT. AND THEY DON’T WANT THEM BUILT AS TOLL ROADS BECAUSE THEY’LL HAVE TO PAY (MORE) OF THE BILL IF THEY DO.

Here’s what’s going to happen if Roger’s ilk convinces the environmental bloc to continue their unholy alliance with the suburban road warriors like McCracken and Daugherty:

  1. We tell TXDOT we don’t want toll roads.
  2. TXDOT says we need to kick in a bunch more money to get them built free.
  3. We float another huge local bond package to do it (just like we did for local ‘contributions’ for SH 45, SH 130, and US 183A).
  4. The roads get built, as free highways.
  5. Those bonds are paid back by property and sales taxes, which disproportionately hit central Austinites, and especially penalize people who don’t or only infrequently drive.

Here’s what’s going to happen if the toll roads get built, as toll roads:

  1. TXDOT builds them.
  2. The current demand for the roadway is large enough to fill the coffers enough to keep the enterprise going without the bonds defaulting.
  3. (Even if #2 doesn’t happen, we’re at worst no worse off than above; with the added bonus that suburbanites still get to finally pay user fees for their trips on the roads).

Here’s what’s going to happen in Roger Fantasyland:

  1. McCracken, Gerald Daugherty, et al have a Come To Jesus moment and decide that we Really Don’t Need Any More Highways In The ‘Burbs.

Now, be honest. Which one of the three scenarios above do you find least likely?

YES, EVEN IF GAS TRIPLES IN PRICE, SUBURBANITES WILL STILL DRIVE. THE OIL PEAK IN THIS SENSE DOESN’T ****MATTER****. The people out there in Circle C aren’t going anywhere in the short term, and it’ll be decades before their neighborhoods are redeveloped in a less car-dependent fashion, assuming we can afford to.