The Pump Jump — in Perspective. Gasoline is still affordable in historical terms.

NRO ^ | August 28, 2003, | Stephen Moore

[.cnI redruM]

With Labor Day upon us and gas prices reaching $1.79 a gallon in many markets and even topping $2.00 a gallon for premium unleaded, newspapers have been full of headlines about “record prices.” But the talk about record highs is based on a common economic fallacy — a failure to adjust for inflation over time. General inflation raises the overall level of prices throughout the economy. The real issue is whether gasoline prices are rising relative to the other costs of goods and services. And if we measure energy and gas prices correctly, we find that gasoline — although the price has risen by more than 20 percent in recent weeks — is still affordable in historical terms.

The Energy Information Administration reports gasoline prices in both nominal and real terms. The real prices are adjusted for the effects of inflation by applying the implicit GDP price deflators to compare prices in constant 1996 dollars. The current “record high” price is quite moderate by historical standards. We had higher retail gasoline prices as recently as 1985, and significantly higher prices from 1979 to the mid 1980s.

The late great economist Julian Simon, a Cato Institute adjunct scholar, was famous for teaching us that it is most important to look at the very-long-term trends in prices of natural resources, if one wants to make predictions about the future. Here is what Simon’s long-term data on energy and gas prices tells us: Gasoline prices paid at the pump have been on a steady rate of decline since the 1920s, with the obvious exception of the 1970s, when we faced an OPEC embargo and gasoline lines. In 1920 the real price of gas (excluding taxes) was twice as high as today. If the price of gasoline relative to wages was comparable today to what it was in 1920, we would be paying almost $10 a gallon for gas. (See The State of Humanity<>, by Julian Simon, Blackwell Publishers, 1995, Chapter 28.)

The same is true, by the way, for the cost of electricity and oil. Oil is slightly cheaper today adjusted for wage growth than it was 50 years ago and five times cheaper than 100 years ago. Electricity to our homes is about one-half as expensive as 50 years ago, and despite the recent blackouts, the service is more — not less — reliable.

Time magazine recently published a major story warning that the world is running out of energy. The authors of that story, Donald Barlett and James Steele, are completely misinformed. Given new technologies in the energy industry and the new oil deposits being found in Russia and other nations around the world, the likelihood is that prices of gasoline, oil, and electricity will fall throughout the 21st century, just as they did in the 20th. If Julian Simon were still alive, he would gladly bet Barlett and Steele or any other pessimists a tidy sum that prices will fall, not rise, over time. He has at least 100 years of history on his side. And he never lost a bet.

One last word on the rising cost of gasoline. American motorists should be mighty pleased that the United States does not adopt the economically dysfunctional high-energy tax policies that are commonplace in Europe. In the Euro nations, gasoline often reaches $4 a gallon with more than half the price collected in taxes. Perhaps $2 a gallon gasoline is a bargain after all.

[.cnI redruM]

Yep, after you adjust for inflation, gas used to cost $10/gallon in the 1920's.

[Eala]

even topping $2.00 a gallon for premium unleaded

Regular unleaded is over $2.00/gallon here in The Peoples' Soviet of Washington, aka The Evergreed State.

[bedolido]

When I first read this thread title, I thought it was about one of the new dances from the 60's. Too bad it wasn't... gas is going up to high, to fast

[Adder]

Its still rationalization and its bs. The market is supposedly being driven to go up from 1.45 to nearly 1.80, a rise of almost 25% in a few weeks. The factors mentioned aren't enough to cause more than a minor hiccup, not send everything into wild gyrations. Ain't we just lucky it isn't more.
Yeah right.
It'll come down like it always does, but don't jerk me around with this nonsense about "the market"[gasp].

[Blood of Tyrants]

This is meaningless. If gas prices had risen proportional to the rate of inflation, we wouldn't be worried. However, periodic spikes in the prices just for sh#ts and giggles screw up the economy.

[VoiceOfBruck]

Here's a handy tool - the Inflation Calculator:

http://www.westegg.com/inflation/

[CdMGuy]

Stephen Moore must have a PhD - pile it higher and deeper. What a bunch of crap. The issue is not what gas today costs compared to years ago, it is what gas today costs compared to 4 weeks ago. Here in CA, regular gas has increased from $1.60 per gallon to $2.08 per gallon in the past 4 weeks, and that is at a very low priced gas station. I know. I fill up twice a week at the same station.

Why is gas up in CA? Well, first there was the broken gas pipeline that served Phoenix from Texas, and then there was the Northeast blackout when the refineries went down for a couple of days. Well, next we will hear that somebody's Aunt Tillie spilled a 10 gallon container of gas in her garage in New Orleans, thereby causing a major gas shortage in California.

BS, I tell you, BS. We are all being screwed by big oil. Over the past few years, oil companies have been allowed to merge under both the Clinton and Bush administrations. They just don't give a sh--. We now have an oligopoly of gasoline providers thanks to our Federal politicians. Of course, they all have their hands in the wallets of those same oil companies.

[xzins]

Horse hockey is throughout the spin "gas isn't really priced as high as it oughta be."

Stay Home Day.

[CMAC51]

>> BS, I tell you, BS. We are all being screwed by big oil. Over the past few years, oil companies have been allowed to merge under both the Clinton and Bush administrations. They just don't give a sh--. We now have an oligopoly of gasoline providers thanks to our Federal politicians. Of course, they all have their hands in the wallets of those same oil companies. <<

Your argument is emotional BS. If there was a shred of truth to what you are saying, you would just keep your mouth shut and by every share of Chevron-Texaco that you could borrow a nickel for, then clean up yourself as Big Oil screwed everybody.

In today's marketplace, gas is a commodity just like corn, wheat, gold and copper. It is traded for "fun and profit" on exchanges such as the Chicago Mercantile exchange. Those exchanges react to about every indicator there is, both real and imaginged. When the price goes up on the exchange, the value of what a gas station has in the ground goes up. The station owner sells at a price representative of the increased value. They would be nuts not to. This is a capalistic free enterprise system we live under. Note that it is the Socialist systems like France and Germany that are paying up to $4.00 per gallon so I don't think they offer a viable alternative.

In this country, everybody is out to make a buck, and that is the way it should be. If you want to pay lower prices, take a serious look at the elements that drive the prices at the exchanges like OPEC monopolies, excess environmental regulation, even high taxes. Those are the elements that affect price. If you don't want to do anything about that, then your stuck. If you really think it is big oil, then buy Texaco because they will be reporting outrageous profits in the future.

[Chemist_Geek]

If you want to pay lower prices, take a serious look at the elements that drive the prices at the exchanges like OPEC monopolies, excess environmental regulation, even high taxes. Those are the elements that affect price.

Those factors are constant, or are only slowly changing.

While I do understand that unrefined and refined gasoline is a commodity, I do have to agree that this retail price jerking around for s#its and giggles, is for the birds.

Another thing to keep in mind is that the American demand for refined gasoline has grown out of proportion to the driving population growth. This is due to the current popularity of extreme fuel-inefficient vehicles. If people want to drive these behemoths, then they are going to have to accept the consequences - higher demand and hence higher prices for gasoline, and decreased availability and hence higher prices for other petroleum products (annual Democratic whining about home heating oil prices, anyone?).

[kaktuskid]

1.Not enough refineries (NIMBYism)
2.Not enough pipeline capacity (NIMBYism)
3.100+ "boutique" gas blends

[Fpimentel]

Did anyone here complain about gas selling for less than a $1 dollar several years ago? Oil was selling for under $12 dollars a barrell.

[CMAC51]

>> While I do understand that unrefined and refined gasoline is a commodity, I do have to agree that this retail price jerking around for s#its and giggles, is for the birds <<

The price fluctuations are hardly for shits and giggles, they are the reaction to true market forces. It is simply that the visible symptom occurs at the gas pump while the root causes are much farther upstream and the majority of people don't want to take the trouble to look that far. It is much easier to blame it on "They are out to screw me".

The truth is that every one of the root causes can be addressed if people really wanted to, but that would take away all of the emotional crutches that are so popular.

[CdMGuy]

It wasn't OPEC raising prices that created these increases. It wasn't state or federal tax increases either. It was greed, plain and simple. There seemed to be a strange coincidence that there were some refining problems in several CA refineries. I recall the same thing a couple of years ago when the electric utilities had to take quite a few generating plants off line on the same day. Voila, instant electricity shortage. Now, we see that situation was contrived. I suspect we shall see the gas shortage situation was contrived as well.

As a businessman, I am sad to say that the days of honest executives is over. Just look around you. Read yesterday's papers. Dick Grasso gets a $140 million gift from the NYSE. It doesn't ever seem to stop. If you don't think that far too many of the executives in this country are out to screw you and feather their own next then you are just kidding yourself.

[CMAC51]

>> It wasn't OPEC raising prices that created these increases. It wasn't state or federal tax increases either. It was greed, plain and simple. There seemed to be a strange coincidence that there were some refining problems in several CA refineries. I recall the same thing a couple of years ago when the electric utilities had to take quite a few generating plants off line on the same day. Voila, instant electricity shortage. Now, we see that situation was contrived. I suspect we shall see the gas shortage situation was contrived as well.

As a businessman, I am sad to say that the days of honest executives is over. Just look around you. Read yesterday's papers. Dick Grasso gets a $140 million gift from the NYSE. It doesn't ever seem to stop. If you don't think that far too many of the executives in this country are out to screw you and feather their own next then you are just kidding yourself. <<

The scope of conspiricy that you are intimating would go far beyond lining the pockets of a few execs. It would necessarily show up in the balance sheets of the companies involved. If you think that the real reason is the oil companies raping the public, buy their stock and laugh all the way to the bank. You won't though because you know that the real reasons are broader than the oil companies.

[RippleFire]

bump

[virgil]

I heard on the radio this morning that 40% of the cost we pay for gasoline goes to the government. It comes out to $78billion per year for gov't

[virgil]

I heard on the radio this morning that 40% of the cost we pay for gasoline goes to the government. It comes out to $78billion per year for gov't. The people who compare our prices to Europe's and keep crying we need to raise taxes are crazy and they should be locked up.

[Tymesup]

50 cents a gallon of increase, times 20,000 miles of driving a year, times half of year of s*its and giggles, divided by 20 miles a gallon, comes to $250 - about a month of car payment, or three months of car insurance. Not that I'm pleased about this, but I'm more concerned about 6% sales tax and 7% property tax and 7.65% (make that 15.30%) for Social Security and 15% income tax.