The Wall Street Journal had a good article and leters about gas prices this week.
Cyril Morong
April 6, 2004
Commentary (U.S.)
Gas Panic
By JERRY TAYLOR and PETER VAN DOREN
The hysteria is building. Newspapers and television news broadcasts scream that gasoline prices today are higher than at any other time in recorded history. But so far most Americans aren't buying into the hype -- and they shouldn't.
While the Sturm und Drang raged over gasoline prices, Gallup released a poll revealing that Americans don't really care all that much about this alleged "terror at the pump." Only 29% of those surveyed believed that the energy situation in America is "very serious" (compared to the 58% who thought so during 2001) and only 35% worry a great deal about energy supply and prices. Moreover, if forced to choose between environmental protection and energy production, a scant plurality of Americans will still choose the former over the latter (48% to 44%).
Is this evidence that Americans are too complacent and self-absorbed to fully understand what's going on in the world around them? No -- it's evidence that both the media and the public-policy elite are long overdue for a refresher course in Econ 101.
In short, gasoline prices are relatively normal by historic terms. Sure, people are paying more for gasoline today than ever before. They're also paying more for houses, cars, lettuce, baseball cards and almost everything else than ever before. Historical comparisons of prices over the years mean absolutely nothing unless we adjust for inflation.
If we adjust gasoline prices for inflation and use 2003 dollars, we find that during the most celebrated days of cheap fuel and gas guzzling cars -- 1955 -- gasoline actually cost $1.66 a gallon on average across the nation. In 1972, the year before OPEC began to flex its muscles, prices were $1.28 a gallon. In 1981, the real record was set -- $2.36 cents a gallon. Heck, prices are only a nickel higher now than at this time last year.
We should not stop there, however. A better measure of the affordability of gasoline over time is not its inflation-adjusted price alone, but its inflation-adjusted price in comparison with our economic resources (in this case, inflation-adjusted GDP per capita). Even though the real price of gasoline was lower in 1972 ($1.28) than today ($1.73), per capita GDP is now $39,919 whereas it was only $20,667 (measured in 2003 dollars) in 1972. Real incomes have almost doubled since 1972, but real gasoline price have risen only 35%. Real gasoline prices were slightly lower in 1955 than today ($1.66 versus $1.73). But real per-capita GDP is almost $40,000 today and was only $14,094 in 1955. Real gasoline prices at the height of the oil shock in 1981 were higher than today ($2.36 versus $1.73), while real GDP per capita was lower ($24,369 versus almost $40,000) than today.
By those measures, then, gasoline prices today are only 37% of what they were in 1955, 70% of what they were in 1972, and 45% of what they were relative to income in 1981.
The idea that politicians haven't the faintest idea what they're talking about when it comes to economics should not surprise us by now. The idea that our nation's top journalists, however, can be so incompetent when it comes to reporting such simple stories as this should give pause. If they bothered to do the math, they'd know there's no reason for panic at the pump. But that's not a very sexy story now is it?
Mr. Van Doren is editor of Regulation, a Cato Institute magazine. Mr. Taylor is Cato's director of natural resource studies.
