Monday, August 11, 2008

Gas: More Affordable Than You Think

Will this year's presidential election be decided entirely by the price of a gallon of gasoline?

Possibly. Americans sometimes get obsessed over the little things and ignore the really big issues. Just about every voter drives, and hence purchases gasoline. They don't like the large increase in gas prices the past couple of years, and they want somebody easy to blame.

In the larger scheme of things, however, gas prices are not as high as everyone thinks. In "A Big Surprise On Gas Prices" a couple of economists note that gas today is still more affordable than it was in 1960, the era of gas-guzzling muscle cars.

Affordability is different than either the posted price, which is obviously higher than in 1960, or the inflation-adjusted price, which is also higher. Affordability takes into account increases in disposable income, which has risen faster than inflation since the 1960's. Hence, the cost of gasoline as a percentage of one's overall income has gone down.

The problem, of course, is that the cost of gasoline as a percentage of income was much lower a few years ago. Probably too low. Americans purchased ginormous SUV's, moved way out into the suburbs and cruised around as if oil would last another few millennia.

At the same time, China and India--and much of the rest of the developing world--began gobbling up cheap oil as well. Only western Europe and Japan, where prices remained high, kept the lid on oil-fueled expansion, for which they will benefit now.

In any event, don't expect Americans to be swayed that gas prices today are really affordable. The political pandering will continue.

1 comment:

MonkeyGirl said...

In Raleigh, gas is still cheaper than a gallon of milk, or a gallon of premium orange juice, for that matter. Granted, we're buying many more gallons of gas at one time than we are milk or juice, but in the grand scheme of things, it's still pretty cheap. Maybe we should take a few lessons from the Europeans, who seem to incorporate energy savings into everything they do.