Gas Prices, Why American Gas Prices are not at a record high.

I, for one, am becoming annoyed by the media and public complaining about gas prices. We all like to pay less for more but sometimes things have to come back to reality. I believe gas prices are not too expensive but instead have been too cheap and possibly could still be too cheap. A number of points on this issue:

1) Every gas price that you hear quoted in the media today is the nominal price of gas. The media and public will then compare these nominal prices with past prices. Comparing nominal prices to historical prices is inherently flawed because it fails to adjust of the effects of inflation. Throughout the history of the United States we have experienced inflation (inflation increased dramatically after the fall of the Gold Standard which started with FDR in 1933 and finally collapsed with the end of the Bretton Woods system under Nixon in 1971). Inflation is defined as a persistent increase in the average price level in the economy. By definition this means not only that prices have increased over time but also wages. It is unfair to say that a $.89 McDonalds burger in 2002 1 is more expensive than the $.15 burger in 1956 2. For one, because per capita income was $2,016 in 1956 compared to $30,941 in 20023. However, if you adjust these burger prices for inflation you find that the $.15 burger in 1956 is equivalent to $.97 in 2002 dollars4. All of a sudden we realize that the burger has actually gotten cheaper by about $.08. The same applies for gasoline!

The Media and public keep stating how gasoline is at its record high. From the Consumer Price Index complied by the US Bureau of Labor and Statistics I gathered the average monthly US city price of gasoline per gallon from 1978 (first available date) to April 20045. I then adjusted the prices into 2003 dollars, compensating for inflation. According to this data the average gas price for April 2004 was $1.875. The all time record high occurred in March 1981 when gas cost $2.8093 per gallon of gas. The average price of gas since 1978 has been $1.7637. Feel free to look at all of these prices and data at http://www.clemson.edu/~jaredh/gas.htm. What this means is that gas prices are quite far from their record high. In fact they are only slightly above their average price. This is expected for April since gas prices are seasonal and always spike as we enter the summertime. Compare the average for 2004 (smoothes at the seasonal spikes) of $1.7585 and we are below the historical average price of gasoline per gallon!!!!!!!

So why all the belly aching? Well I believe it is because gas prices have been too low for the past few years. Consider that the all time record low since 1978 was $1.1195 (adjusted for inflation of course )and occurred just a few years ago in Feb. 1999. The reason gas prices were this low is because President Clinton, in an effort to help Al Gore get elected in the 2000 presidential race, tapped our nation’s emergency oil reserves to artificially lower the price of gas6. I feel it quite dangerous to spend our emergency reserves to play politics and to simply cause slight effects on gas prices. Especially considering that most of the oil the US depends on is provided from countries that the US has strained ties with. If we were forced into a conflict with one of these countries we would not only lose that oil source but we would be forced to use more oil because of the military efforts (tanks, fighters, and battleships use a lot more gas when in war than they do when in storage). Therefore, our emergency reserves should be just that, reserved for an emergency.

2) My second complaint regarding these complainers concerns the War on Terror and the War in Iraq (trust me I separate them for good reason, more on that in another rant). An overwhelming majority of Americans and American leaders supported the Bush Administration when they decided to declare a War on Terror and A War on Iraq. I am not arguing that choice. I am asking, what did you expect? The War of Terror is a War that is predominantly focused on Muslim nations and more importantly oil abundant Muslim nations. The war on Iraq has led to fear and instability in the entire Middle East. How naive it would be to think the US could invade or at least threaten these countries and yet expect that the prices of an export that predominately comes from these countries remain unaffected.

3) My third insight comes from a practice that I partake in but I find few others do. I like to stop sometimes and ask, “What about the rest of the world?” On this topic I hear all of the American complaints about high gas prices. So I ask “what are gas prices around the world like?” Well please, have a look here, http://money.cnn.com/pf/features/lists/global_gasprices/price.html. All of a sudden these high gas prices in the US look pretty nice. England is paying ~$5.55 per gallon, German ~$5.29, Italy~ $4.86, and Japan ~$3.84. On the bright side, if you want cheaper gas prices you can always enjoy the standard of living in any of these resorts Thailand, Russia, Kazakhstan, Tajikistan, and Azerbaijan. They are all cheaper than the US average.

In conclusion, I feel that gasoline prices are not too high. They have been artificially low and now as they return to normal they seem high. The media sensationalizes this story reporting of record highs while knowing that the data they are reporting are nominal prices, which are misleading and blatantly false. I know many news channels are aware of this because I have emailed them and told them (believe it or not I have not gotten a response). Considering we are at War and sitting pretty sweet compared to the rest of the industrialized world, I think everyone should calm down, stop believing the hype of the media, and write me a thank you letter. After all, if gas prices were that high would you not expect more of an effect on travel?7

That’s why I’m fed up, why aren’t you?

(1)I called McDonalds
(2)http://www.fiftiesweb.com/pop/mcdonalds.htm
(3)http://www.usc.edu/schools/sppd/research/casden/research/data_folder/us_pcinc.pdf
(4)http://www.westegg.com/inflation/
(5)http://data.bls.gov/servlet/SurveyOutputServlet
(6) http://www.iht.com/IHT/BK/00/bk092500a.html
(7) http://seattlepi.nwsource.com/local/175364_memday28.html

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This entry was posted on June 02nd, 2004 and is filed under Economics, Political, Social Issues. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.