Jewish World Review May 21, 2004 / 1 Sivan, 5764
Sky-high gas prices? Not really
The correct answer is (b). Gasoline today is no more expensive today than it has been for most of the postwar period, and it is considerably cheaper than it was in the late 1970s and early 1980s.
What's that, you say? You've been driving for years and you know for a fact that you never before had to pay $2 for a gallon of gasoline? You can recall gas stations charging less than 50 cents a gallon back in 1970? Don't worry, there's nothing wrong with your memory. But the fact remains: The cost of gasoline today isn't toppling any records.
If you find that hard to believe, you're in good company. The lead item on John Kerry's campaign website, for example, declares that "gasoline prices are setting new records" and assails the Bush administration for having "done almost nothing to get gas prices under control." Meanwhile, a sizable swath of the press has been reporting for weeks that gasoline prices are going through the roof. A sampling:
"The retail price of gasoline hit an all-time high Tuesday" (Associated Press) . . . "As summer driving season approaches, gasoline prices are setting record after record" (CBS News) . . . "The surge has . . . sent gasoline prices to record highs" (Financial Times) . . . "Gas prices hit a new high this week" (National Public Radio) . . . "US gasoline prices already at record highs for weeks appear headed into uncharted territory this summer" (Washington Times).
But these stories, and many others like them, leave out something essential: inflation. Comparing today's prices with those of yesteryear is a meaningless exercise unless the prices are given in constant, or "real," dollars. And in real dollars, gas prices today are well, normal.
Sure, the $2.03 being charged at the pump today seems high. But in actual financial terms, it's a lot less onerous than the $1.25 a gallon motorists were paying in 1980 a whopping $2.80 when translated into 2004 dollars. (Adjusted the other way, today's $2.03 pump price is equal to 89 cents in 1980 dollars.) When it comes to historical price comparisons, nominal dollar amounts signify little. It is the inflation-adjusted price that tells you whether the true cost of a product has increased, decreased, or stayed the same.
There's also the question of affordability. Adjusted for inflation, gasoline prices today are roughly where they were in the 1950s but per-capita real income then was no more than half of what it is today. Which means that for a typical driver 50 years ago, gasoline was really twice as expensive, in terms of the bite it took out of his budget, as it is now. Only in the shallow sense of nominal pump price is gasoline today "setting record after record." In reality, it is much cheaper than it used to be.
That is especially true over the very long term. In his 2000 book "It's Getting Better All The Time," economist Stephen Moore noted that while US energy prices fluctuate all the time, the trend for the past century has been toward ever-greater affordability. Adjusted for wage growth, the price of oil was about five times cheaper than in 1900, Moore wrote, and roughly the same as it was in 1950 and that was true notwithstanding the vast amount of oil and gasoline that Americans have consumed. How can gas and oil be getting more affordable when we consume so much? The secret, Moore says, is innovation and technology:
"Before the 1950s it was almost unthinkable that oil could be drilled and extracted from the bottom of the sea. In 1965, one of the first offshore oil rigs drilled oil from 600 feet deep off the coast of California. By the late 1980s, the record for offshore oil drilling reached 10,000 feet. It has been precisely this kind of innovation that has confounded the doomsayers who in the 1960s and 1970s predicted global oil shortages and even depletion."
None of this is to deny that gasoline prices have been climbing lately. Economic growth around the world is pushing up demand for fuel, which in turn is tugging the price of crude oil upward. More expensive crude naturally results in more expensive gasoline.
But those higher prices will, as always, spur energy companies to increase production and resupply dealers as quickly as possible. And as the higher supply enters the market, prices will begin to fall.
If I were to guess, I'd say the current hyperventilating about "record high" gasoline prices will be forgotten by mid-June. Enjoy the experience of $2-and-up gasoline while you can; it won't be long before the eternal interplay of supply and demand sends prices southward once again.