Comment: For most of us, price of gas is not a crisis

Adjusted for inflation and real wages, we’ve paid more in recent decades, except for lower income families.

By Severin Borenstein / Special To The Washington Post

In 1960, gasoline cost 31 cents a gallon. Do you find it outrageous that it costs more than that today? If your answer is no — because the price of almost everything has gone up in the past six decades — then, like me, you may be exasperated by much of the recent commentary on the cost of gas.

“This city just recorded the U.S.’s highest-ever average gasoline price,” reads a typically breathless headline from Market Watch, referring to San Francisco. Like many recent observations, that one ignores inflation over the years and growing earning power. But if you ignore changes in prices and incomes, then just about all goods and services would seem unaffordable today, relative to the past, including food, housing, movies and haircuts.

Adjusting the gasoline price data to account for general price inflation produces a less dramatic story line than the one blaring on cable news. Real (that is, inflation-adjusted) U.S. gas prices are nowhere near all-time high. In today’s dollars, gas prices averaged more than $5 per gallon in the middle of 2008 and were over $4.50 for stretches of 2011 and 2012, compared with the national average Tuesday of $3.40.

It is true that gas prices are significantly higher today than they were in the depth of the pandemic-caused recession last year (when they reached a monthly low of $1.99 in April 2020). But that is because people were driving far less when many workplaces, stores and restaurants were closed. Shouldn’t it be pretty obvious that the price of a good when demand suddenly plummets isn’t the price that prevails for the long run?

Some will retort that people who can barely afford to buy gas even when it’s inexpensive get hammered when its price rises, whatever the reason, and they need help. I agree completely with the basic sentiment that people with low incomes need assistance. But focusing on the price of gasoline obscures the larger social issue. The economic problem here is rising inequality of income and wealth, which makes everything harder to afford, including housing, food and, yes, gasoline. Unlike housing, however, gasoline prices haven’t actually changed much in real terms over the past couple decades. What should be addressed is the everything affordability crisis for people being left behind in the U.S. economy, a task that will take stronger social programs, educational options and job opportunities.

We don’t need to address the gasoline “affordability crisis” for everyone else. State and federal governments have many public policy challenges to confront. Ensuring that polluting, climate-changing fuels remain artificially cheap for people who think gasoline should never cost more than $1 or $2 or $3 — or 31 cents — is not one of them.

For the majority of households, not only is gasoline still affordable; it’s no more of a strain on the budget than it has been in most recent years. That’s because, while real gasoline prices are higher now than in some past years, so are most incomes. If you are an average household and have to buy 3 gallons of gasoline per day — a bit more than the typical household uses — you currently have to spend about 5 percent of your income on gasoline. That is slightly more than the 4.4 percent average you had to spend in the five years before the pandemic (2015-2019) when oil prices were pretty tame, but it is well below the average 6.5 percent of your income that gasoline ate up in the previous decade (2005-2014).

So, although gasoline has become less affordable to those whom society is leaving behind, it has not become less affordable to the typical household.

And another thing has been changing over the years: cars. They have gotten more fuel-efficient even as they have also been getting fancier and heavier. Since 2005, average fuel economy for cars and light-duty trucks has risen from just below 20 miles per gallon to just above 25 mpg. It now takes about 5.5 hours of work at the average hourly wage to buy the gas for a 1,000-mile driving trip in a vehicle with average fuel economy. It took 8.2 hours, on average, from 2005 to 2009, 7.9 hours from 2010 to 2014, and 4.9 hours from 2015 to 2019.

Nonetheless, voters love to hate rising gas prices, so politicians feel obliged to look like they are doing something when they go up. The usual something is releasing oil from the Strategic Petroleum Reserve, a move President Biden ordered last week. The most optimistic research, however, suggests that doing so has modest, if any, effect on crude oil prices.

Still, that’s a larger effect than we can expect from the other something that Biden ordered: an investigation by the Federal Trade Commission into gasoline market competition. The basis for the FTC inquiry is that crude oil prices have fallen over the past month while gas prices have barely budged. But it has been known for at least 25 years that gas prices follow drops in crude-oil prices with a lag that is typically more than a month. Like nearly every economist who studies these markets, I expect the FTC study to end with a quiet whimper.

There are a couple of reasons for optimism, where the cost of gas is concerned. First, oil prices had dropped a bit in November (even before they declined steeply last Friday following news about the emergence of the omicron coronavirus variant), so gasoline prices are very likely to fall in the coming weeks. More importantly, there is something many of us can do — over the medium term, if not immediately — that would be much more effective in lowering gas costs than tapping the strategic reserve: Use less gas. Individually, we can save money by buying more fuel-efficient cars, or cars that don’t use gasoline at all. Collectively, policies that reduce gasoline use will reduce market demand, and that could cause gas prices to crater. True, those lower prices will make it harder to quit fossil fuels; but there are certainly worse problems to have than low gas prices caused by weak demand.

Severin Borenstein is the E.T. Grether chair in business administration and public policy, and faculty director of the Energy Institute, at the Haas School of Business at the University of California, Berkeley.

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