2006 April 29 Saturday
Gasoline Nears 1981 Price In Inflation Adjusted Terms

Using inflation-adjusted comparisons crude oil and gasoline prices are nearing levels last seen in 1981.

Crude prices are approaching the true all-time high of close to $40 seen in the early 1980s, which translates to around $90 in today's dollars. Regular unleaded gasoline prices currently average above $2.91 per gallon at the pump, not far from the record of nearly $3.07 from September 2005. They would need to be above $3.12 in today's dollars to match the more than $1.41 price from 1981, according to U.S. government data.

The big difference between today and 1981 is that back then many oil producing nations excess production capacity and were capable of increasing supplies. Prices could drop dramatically from 1981 levels and do so fairly quickly. But today oil substitutes will take years to bring on line and China's demand for oil continues to grow. But on the supply side it is beginning to look like peak oil.

High gasoline prices hit lower income folks the hardest.

For many of the 39 million households making less than $30,000 a year, the difference between $2 gas and $3 gas is the difference between spending 10% of income on gas and 15%. In a word: Ouch!

The best bet for poor folks is to move to places closer to jobs and choose jobs closer to home.

You have some fairly easy ways to reduce gasoline costs such as slow down, properly inflate tires, and replace dirty air filters.

Driving 65 instead of 75 mph reduces fuel costs 13 percent. Driving 55 mph would save 25 percent.

...

A dirty air filter and under-inflated tires can increase your fuel cost as much as 13 percent

It is worth thinking about the components of the cost of a gallon of gasoline.

The cost of crude oil represents 55 percent of what consumers pay at the pump, according to the U.S. Energy Information Administration. Another 22 percent comes from the cost of refining, 19 percent from taxes (on average, about 44 cents per gallon goes to state, federal and local taxes) and 4 percent from marketing and distribution, according to the administration.

Parenthetically, oil is a rising fraction of gasoline costs. In 2003 oil was only 44% of the cost of a gallon of gasoline.

With fuel costs at the time of this writiing at approximately $3 per gallon and $75 per barrel that suggests each increase of $25 per barrel translates into $0.55 per gallon of gasoline. So $100 per barrel would probably bring about $3.55 per gallon, $150 per barrel would probably bring us $4.65 per gallon, and $200 per barrel would hit us with $5.20 per gallon. This means that the more gloomy projections of "Peak Oil" pessimists would still only send American gasoline prices up to levels that Europeans have been paying for years. A shift toward diesels, smaller vehicles, and hybrids could make such fuel prices affordable.

My calculations above may underestimate the effects of oil price rises on gasoline prices. As oil costs go up the cost of energy used in refining and distribution rise as well. So some of the other costs of gasoline will rise as well when oil prices rise.

Bicycles, mopeds, and motorcycles would gradually become more popular at each step up in oil prices. People would choose jobs and home locations to reduce commuting and choose cars for higher gasoline efficiency. We could adjust to high fuel costs without severe drops in living standards.

Substitutes such as oil shale, coal-to-liquid (CTL) via variations on the Fischer-Tropsch process, and batteries in vehicles effectively put upper limits on the price of oil and gasoline. The biggest question I want answered: What are the real costs for oil shale extraction, CTL, and other oil substitutes?

What about the macroeconomic picture? US Federal Reserve chairman Ben Bernanke can not figure out whether the bigger threat from high oil prices is inflation or a cooling of the economy. Money spent on energy that therefore is no longer available to buy other goods and services.

Higher fuel costs potentially could push the rate of overall inflation higher, but Bernanke also noted an opposing risk: that the burden of new costs at the gas pump will take money out of consumer wallets and slow economic growth.

"Our current assessment is that the risks to inflation are perhaps the most significant at the moment," Bernanke said.

For more than a year, the US economy has absorbed the impact of rising oil prices. Consumer spending has not slowed. And the "core" rate of inflation, with food and energy stripped out, has been contained at an annual rate of about 2 percent.

Still, the core price level for consumers rose 0.3 percent in March, the most recent monthly inflation report. That was higher than expected.

The energy price increase is like a big tax hike on earnings. At some point energy price hikes have got to trigger a recession.

While the economy grows rapidly wages and benefits are declining in inflation-adjusted terms.

Shaking off the effects of Hurricane Katrina, the economy grew at an annual inflation-adjusted rate of 4.8% in the first quarter, the Commerce Department said. The burst offset a meager 1.7% growth rate in the last three months of last year after the hurricane struck the Gulf Coast.

Only once in George W. Bush's presidency when the economy grew at a 7.2% rate in the third quarter of 2003 has economic growth been more robust than in the first quarter.

...

In a separate report, the Labor Department said total compensation costs salaries and benefits for all civilian workers rose 0.6% in the first quarter. That was the slowest pace in seven years. Adjusted for inflation, employment costs fell 0.8% for the first quarter and 0.5% for the year ended in March.

The recent fast economic growth might be rebound from Hurricane Katrina.

Averaged out over the last two quarters, the economy grew somewhat less than the 3.5 percent rate clocked in 2005 and substantially less than the 4.2 percent pace of expansion in 2004.

And despite their spending spree in the first three months of 2006, American consumers are showing some signs of fatigue, as the University of Michigan reported yesterday that its index of consumer expectations declined in April. Wage gains, according to the government report, actually slowed during the first quarter rather than improving with the rising economy.

"A majority of households now expect an economic downturn and bad financial times by the end of this year," said Richard Curtin, the director of the University of Michigan's Surveys of Consumers.

The housing market shows signs of cooling. Demand for housing is shifting toward lower priced homes.

Sales of new homes nationwide shot up in March at the fastest pace in 13 years, reflecting a rebound from bad weather in February, but prices were lower, the Commerce Department reported Thursday.

Sales of new single-family homes rose 13.8 percent last month to a seasonally adjusted annual sales rate of 1.213 million units. The increase represented a recovery from a 10.9 percent plunge in sales in February.

But the median price of homes sold in March dropped to $224,200, down 2.2 percent from what homes were selling for in March 2005. It was the first time home prices dropped over a 12-month period since December 2003.

Higher oil prices will drive down the value of homes that are further away from work locations. The cheapest commute is a walk from the bedroom to a home office. The second cheapest is a walk across the street to an office or factory.

Share |      By Randall Parker at 2006 April 29 03:31 PM  Economics Energy


Comments
Wolf-Dog said at April 29, 2006 6:32 PM:

One interesting fact about the housing boom, was that the higher prices were in part driven by the fact that those who had the means, were buying more houses for investment in addition to their residence. This was happening at a time a lot of people were not even able to own their own residence. The top 10 % own more than 90 % of the wealth, and the distance is growing.

The reason the inflation adjusted salaries are declining in many professions, is not only because of the inernational labor arbitrage, but also due to the fact that technology is causing productivity to increase in all ares, and the upper class basically benefits a lot more from knowledge and aptitude based economic trends. Nothing can be done about this because this Darwinian stratification is genetic, and technology is merely accelerating it.

It appears that the Democrats will win the next Presidential Elections because there will be a lot of disgruntled people who will feel left behind. Additionally, the war in Iraq is not going well, and the lack of success in Iraq (the fact that no economic benefit is derived in exchange for the dead soldiers), will also be counted against the Republicans.

If the United States had a more self-sufficient economy without international trade deficit, the separation between the upper and lower classes would have been much more tolerable because productivity is increasing so fast that the leftover bread crumbs would be sufficient for every citizen, without the trade deficit.

The Television appearance of Bush, talking about the future of hydrogen cars, was very insufficient. He never explained by which method the hydrogen would be manufactured. Instead of starting a Manhattan Project for energy with at least $150 billion per year in at least a dozen independent directions of research, Bush is neglecting national security.

Ivan Kirigin said at April 29, 2006 8:06 PM:

Check this out:
http://cafehayek.typepad.com/hayek/2006/04/fuel_for_though.html

"Note that in 2005 our cost of complying with federal-income-tax regulations was $53.7 billion more, in real 2005 dollars, than the extra amount we're now spending compared to 2004, on an annual basis, for gasoline.

And Congress has the gall to pontificate about the alleged unacceptability of the higher prices now charged by oil companies."

I look forward to cheap fuel-efficient cars (not necessarily hybrids) like the new Honda Fit.

I do get annoyed when people talk high gas prices. Somehow, when millions of home-sellers make billions of dollars on real-estate, it is good only until some bubble in price collapses. When oil companies make relatively mediocre profits, it's time to lynch the money grubbing CEOs.

I get especially annoyed when people talk environmental damage and the chaos of peak oil in the same breath, as if they are not presenting a problem and solution at the same time.

Randall Parker said at April 30, 2006 1:38 PM:

Ivan,

The United States uses about 21 million barrels of oil per day or about 7,665 million barrels per year. A single dollar increase in a barrel of oil therefore costs $7.6 billion dollars per year. How much did the price of oil go up by from 2004 to 2005 on average?

Granted, your link referenced gasoline only. But the amount of money spent on federal tax regulations is small change as compared to the amount spent on oil. At $70 per barrel our cost is $536.55 billon per year.

But what is the point of the comparison? That we could save a bunch of money by abolishing taxes? Or that somehow the cost of tax compliance could be lowered? Some of those costs are unavoidable as long as we have taxes. Other costs in the tax code are there because free market capitalists are good at spending money on lobbyists and campaign contributes to get themselves special tax treatment. They buy favors in the political favors market. Do you favor draconian regulations to suppress the political favors market?

Ivan Kirigin said at April 30, 2006 6:22 PM:

The point is mirrored in the link: politicians complaining about the rise in price of gasoline - when there was a greater rise in tax compliance cost - is a bit silly. Take the further step that most actions that congress would take would probably hurt the situation, and it makes legislation look even worse.

I'm pretty sure you and I 100% agree on energy policy. The US should make big investments in researching alternatives, for about 36 reasons.

As far as tax reform, I'm a proponent of a simpler, more transparent system. "Flat Tax Revolution" is a book that gives dozens of reasons why -- and simplicity avoiding curruption is just one of them.

Randall Parker said at April 30, 2006 6:49 PM:

Ivan,

They measured the cost of increase compliance from 1995 to 2005. Comparing that to an oil cost increase for a single year doesn't seem equivalent.

Since 1995 the cost of oil has gone up by a few hundred billion dollars.

Also, I wonder at the claim for the increased compliance cost. People are using Turbo Tax and other automated form preparation services. I use a tax accountant whose fees have not changed much. What kinds of people or businesses are paying higher compliance costs and for what reasons? I'm too busy to go read the actual report. If anyone has the time to do so go here and download and read the PDF and report back a digest.

If anything, I'd expect the rise in the percentage of the population getting hit by the Alternative Minimum Tax is simplifying tax preparation.

As for simplifying taxes: Reagan (a far better man than the Bushes) did it and then the lobbyists spent the following couple of decades de-simplifying it.

At this point my hope is that the high energy prices will cause a big entrepreneurial outburst of energy tech advances. My expectations from the US government on energy research are low unfortunately.

Ivan Kirigin said at April 30, 2006 8:04 PM:

"Comparing that to an oil cost increase for a single year doesn't seem equivalent."

That was pointed out in the comments. The idea is interesting as a comparison, but because oil hasn't much to do with taxes, the comparison is a strech to begin with. It can be yet another reason to not listen to politicians talk about the price of oil.

As far as cost increases, I wonder if those figured factored in SOX compliance. I'd imagine the numbers would be much higher then.


On a side note, I'm starting to ride a bike to work (11 miles Somerville to Burlington, MA). It isn't for the gas savings, but the flexibility in schedule (now I commute with my wife) and the exercise. I already have a Vespa, and some friends will buy some soon. I'm about to buy a Honda Fit, a non-hybrid fuel efficient, cheap small car. Many friends are also planning on buying them.

You'll have to take all that with a grain of salt -- i'm not exactly going on a very long commute to a minimum wage job -- and neither are my friends, so the % of income spent no energy is small.

Ned said at May 1, 2006 5:22 AM:

Here's a handy-dandy chart from Popular Mechanics that compares the advantages and disadvantages of various alternative fuels: http://www.popularmechanics.com/science/earth/2690341.html.

Anonymous said at March 11, 2011 7:19 PM:

"Flat Tax Revolution" is a book that gives dozens of reasons why -- and simplicity avoiding curruption is just one of them.


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