James Surowiecki, writing in the New Yorker, has a piece about gasoline prices: "Dan Ariely, a behavioral economist at Duke, has even argued that the way we buy gasoline—standing at the pump and watching the dollars pile up—is inherently disheartening." The New Yorker Web site doesn't have hyperlinks, but a Web search via Google (use it while you can, before the government wrecks it) turns up this piece in which Mr. Ariely observes, "you stand next to the pump, you fill it up, there's nothing else to do and you're watching these number go up."
What if some financial services company that was billing car-owners to their credit cars on a monthly or semi-annual basis anyway — say, a car insurance company that already had the information in its computers on the make and model of a customer's car and even how many miles the customer drives a year in the car — started offering consumers annual contracts for the gasoline costs of their cars. That would allow individual consumers to sell away the risk that gas prices would go up.
There are already markets in which a sophisticated consumer might play around with this sort of thing. Someone who buys a new Prius and is concerned that gas prices are going to go to 99 cents a gallon and he won't be able to resell the thing might hedge by investing short in the oil market, for example, while someone who buys a new Cadillac Escalade and is concerned that gas prices are going to go to $8 a gallon and he won't be able to resell the thing might hedge by investing long in the oil market. But sizing the bet and tracking it adds to the hassle for a consumer rather than simplifying it.
What I'm suggesting would simplify matters for customers rather than complicating it. They'd no longer have to drive around looking for the cheapest gasoline price or put in a few gallons at a high price to have enough in the tank to get to the low-price station across town. They wouldn't have to worry about gas prices ever again for a year. And the gas-price-insurance company would use its scale to price and hedge the risk and to bargain for deals from preferred providers — customers with Geico auto-and-gas insurance, for example, could fill up their tanks at any Exxon-Mobil or Getty station. When you buy the car insurance, the agent (or the software) would ask you whether you want the gasoline-price coverage, just the way now they ask whether you want the roadside assistance and the glass coverage. If you bought it, you'd eliminate that Dan Ariely-James Surowiecki-described sensation of standing at the pump and watching the dollars pile up, because you'd know you already paid for it. Instead the feeling would be more like going back for a plate of seconds at an all-you-can-eat buffet for which you paid when you walked in the door, or like the feeling of ordering more stuff from Amazon once you've already paid the flat fee for a year's worth of free quick shipping.
If this sounds familiar, it's similar to how health insurance now works. Customers prepay health expenses to level out the payments over time. The same distorted incentives that come with third-party payments would apply. Customers with pre-paid gas contracts would probably use their cars more, the same way that customers with Cadillac-style health insurance plans consume more medical services (without necessarily being healthier).
Everyone's ready with government-imposed solutions to $4 a gallon gasoline — release the Strategic Petroleum Reserve, subsidize electric cars, you name it. But if gas-price volatility is a problem for consumers, there are certainly private, market-based ways of solving the problem. Mr. Ariely's talk linked above focuses on ways to promote energy conservation by extending the discomfort of the gasoline-pump sensation to other energy use, such as home electricity consumption. But one can look at it another way, too, and aim to reduce the discomfort rather than to multiply it.
