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).