Reply #16: The real key is what is the true price point. i.e. at what price does it happen? [View All]

[happyslug]

Basically looking around the world when the price of oil per gallon equals the effective minimum wage for a group, that is when they STOP buying oil. Right now that is $5.85 is the US minimum wage.

Many states have higher minimum wage rates (Some states have LOWER rates, but such lower rates are preempted by the higher federal rate):
http://www.dol.gov/esa/minwage/america.htm

I once did a calculation (and have done it several times on DU) that shows when US minimum wage workers can NO longer pay for gasoline. In 2005 I posted it here:
http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=266&topic_id=586

I wrote it when Minimum wage was $5.15 per hour, but here is the relevant part (updated to reflect $5.85 per hour minimum wage):

Right now the US Minimum wage is $5.85 per hour or roughly $12,168 a year (there are 2080 work hours in a 52 week 40 hour per week work year, thus a good approximation of a person's yearly income can be determined by multiplying their hourly income by 2000). Out of that $12,168, 7% has to be paid as Social Security tax, and depending on the State 2-5% as local wage and Income tax).

Lets look at someone from my home state of Pennsylvania who is earning Minimum wage:

2080 hours times 5.15 Equal = $12,168
7% of 12,168 equals = $851.76. Subtract FICA tax that leaves the minimum wage earner just 11,316.24.

Local wage tax in Pennsylvania is 2% of $12,168 or $243.36.
State Income tax is 3.07% or $373.56

Subtracted both $243.36 and $373.56 from the $11.316.24 above that leaves $10,699.32.

Thus after our minimum wage worker has paid his taxes (all taken out by his employer so he gets to keep none of it) he has $10,699.32 per year to live on (For this calculation I will assume he pays no Federal Income Tax, if they are single that is NOT rule, if married they pay nothing but you have the additional costs of a family).

Now if he is able to get into public housing he has to pay 30% of his gross income ($12,168) as rent ($3650.40 per year or $304.20 per month). That leaves him $7048.92 ($10,699.32 less the rent of $3650.40).

He has to eat, If we assume he will eat three meals a day, 365 days a year (total number of meals 1095) at $2 a meal (Possible, through difficult). Eating will run him about $2190 per year. Subtracting that from $7048.92 (the amount after taxes AND rent) leaves $4858.92 for his transportation needs (again assuming no family, no medical bills, no life and to get to his job he needs a car).

If he is a typical American he has a job in the Suburbs (for that is where the jobs are). To get to his job he will have to drive. He has to pay for insurance, the vehicle itself and its maintenance (new tires, brakes other repairs). These vary from person to person, vehicle to vehicle, but for this calculation we will assume $1000 per year (for ease of calculations, actual costs of insurance and maintenance and repairs will exceed that cost). That leaves $3858.92 for gasoline.

The average American uses a car that gets 20 miles to the Gallon, and travels about 15,000 miles per year (Insurance Company figures). In effect he uses 750 gallons of gasoline per year. At $3 a gallon he is spending $2250 per year, at $4 a gallon he is spending $3000 per year. at %5 a gallon he is spending $3750 out of $3858.92. At $5 a gallon that leaves the workers with only $108.92 for ALL OTHER COSTS ON LIVING.

Now there are errors in the above (I tried to keep them on the low side for people will try to stretch their ability to pay as long as they car). Most poor people can not just trade in their cars for a more fuel efficient car. A good used car THAT RUNS costs about $3000 (You can buy cheaper cars but they just tend to be unreliable i.e. break down with the inherent costs to repair). Anyway such a change would take out the $3000 a minimum wage worker has to spend on gasoline so really NOT a solution.

$2 a meal is ridiculously low ($180 a month) as is the yearly Insurance and maintenance costs of $1000 (or $84.58 per month). I do this calculation to show you that somewhere BEFORE we get to minimum wage workers hourly wage, they must stop buying gasoline. If they are in a job that requires them to drive, they have to quit (you can NOT keep a job that costs you more to keep than you get from that job).

Now the above calculation is less accurate for higher income people, you can only eat so much per year. Thus the $2190 for food will go up as income goes up but will peak quickly and than stagnant (You can only eat so many meals per year). The above calculation is probably accurate for people up to 2-3 times minimal wage (20,000-30,000 a year) but less accurate for people over that income. Remember as your income goes up the percentage that you spend on food goes down, i.e. some where between $5 a meal and $10 a meal you just stop spending more on food. Thus a person who is making $50,000 a year may spend $5000 on food per year, (or about $10 a meal or 10% of his income on food) a person making 100,000 a year will spend about the same, i.e. $5000 a year but that would be 5% of his income).

My point here is to give you an idea when people will STOP buying gasoline and the next group I think that will stop buying is American Minimum wage workers who will stop at about $4 a gallon. If there are NOT enough minimum wage workers that stop buying (most likely because such workers are NOT buying gasoline TODAY for they can not afford the current price for gasoline) than the price of gasoline will go up till the price does go high enough so that enough people can no longer afford to pay for gasoline.

Given the above I think the price of Gasoline will "peak" somewhere between $5 and $10 a gallon. Please note this is the first of many future peaks, as we go down the back slope of Hubbert's peak, prices will go up and down (Through generally up). Price instability will be the norm to a good degree (For example if prices reach $10 a gallon, people earning $10 a gallon or $20,000 a year will stop buying gasoline. After a while enough such people will stop buying so that a glut of gasoline develops. This will push the price down, but not to what it is at present. As the price drops Gasoline will become affordable to more and more people who will buy gasoline causing the price to go back up and starting the cycle all over again. Sooner or later the price will stabilized but only after a lot of such fluctuations and then only temporarily till a new radical drop in production that starts the whole process of increase price and decline in demand all over again.

My point is simple, $4 a gallon is just the START of problems, not the peak of oil problems.