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Gas prices aren't at record levels... yet
Drivers are experiencing gas prices they haven’t seen in close to a decade, but that doesn’t mean that today’s gas prices are at record-high levels. Last fall, the price for a gallon of gasoline seemed unusually high relative to oil prices and some suspected it was related to collusion among oil companies. As gas prices were increasing, the US joined several other countries in releasing oil stored in their strategic reserves. President Biden even went as far as asking the Federal Trade Commission to open an investigation into whether oil companies were colluding to raise prices at the pump.
Following the Russian invasion of Ukraine, gas prices have jumped even further. Russia is the second-largest oil producer in the world after the United States, so the impact of Russian sanctions is being felt around the world in higher gas prices for everyone. The current average price for gasoline in the United States is around $4.32 per gallon. Some states have been hit harder than others, but the general trend has been higher prices for everyone:
But are these new prices actually the highest the US has ever seen? In nominal terms, yes, US consumers have never seen gas prices like this before. The previous high price (at the pump) was back in July of 2008 when the average retail price of gasoline in the US was around $4.11 per gallon. We have officially passed that at the national level, which leads some to proclaim these new prices as record-setting highs, but that’s misleading.
Higher prices are hurting a lot of American families. I haven’t seen people really arguing that higher prices aren’t having an effect on many people. The issue of whether these prices are record high centers on the issue of people not accounting for the broad economic trend of inflation. Over time, prices increase, but so do wages and prices for many other things we buy. If we want to compare prices across time, we need to account for this.
We have the tools to make these adjustments using data from the Bureau of Labor Statistics (BLS). The Consumer Price Index (CPI) measures average price changes for a bundle of goods and services based on prices for urban consumers. There are other indices that account for different bundles or different geographic areas. This measure is the key one used to measure inflation across the United States and we can use it to measure the real price of various items (like gasoline) over longer time periods.
So while current prices seem really high compared to previous prices, we really need to account for the “real price” of gasoline by accounting for inflation. Using data from the US Energy Information Administration and the BLS, here’s a look at the nominal price of gasoline (the price at the pump) and the real price of gasoline (adjusted to current dollars). These values are based on the national monthly average because CPI data is reported on a monthly basis.
Once accounting for inflation, today’s prices are trending toward some of the worst prices we’ve seen, but prices were more painful during the Great Recession and in the early 1980s. Gasoline may have only costs around $1.40 at the pump back in 1981, but that would be equivalent to about $4.52 today. The record-high average actually occurred in June 2008 when the real price of gasoline was about $5.27 per gallon. This is 21% more than what we’re seeing at the pumps right now.
When people focus on nominal values rather than the real value, they’re falling victim to a concept known as money illusion. Our focus should be on what your income can buy. While prices have gone up, so have incomes. Focusing on one while ignoring the other isn’t productive. Back in 1981, the average worker made around $7.31 per hour. At that wage, an average worker would need to work 11.5 minutes to purchase a single gallon of gasoline. Today, the average worker earns almost $27 per hour. At a current price of $4.32 per gallon, today’s worker needs to work only 9.5 minutes.
While it’s taken less time for workers to earn enough to purchase a gallon of gas, the fuel efficiency of automobiles has also increased significantly since the 1980s. In the early 1980s, the average fuel efficiency was about 16.5 miles per gallon for light-duty vehicles. Today it’s around 25.3 miles per gallon. Not only do workers need to work less time to buy a gallon of gasoline, but that gallon will also take their car a lot further than it used to. Gasoline prices would need to increase to $5.17 per gallon for workers to experience the same “time cost” but even that ignores fuel efficiency gains.
A final way of looking at the impact of these higher prices is to consider what fraction of personal expenditures is spent on gasoline. The rationale for this measure is that while prices may have increased a lot recently, they may not be a significant share of a person’s total expenses. The US Bureau of Economic Analysis (BEA) tracks personal consumption expenditures for households and divides those expenses into multiple categories. The category we want to consider is the amount an average person spends on gasoline and other energy goods:
This level of spending is tracked at the quarterly level, so the last data point is for December 2021. The line will likely increase following the release of 1st Quarter data for 2022. It won’t likely be at a level that was seen back in the 1980s when nearly 6% of expenditures were associated with gasoline and other energy sources.
So, are gas prices high? Yes, absolutely. Prices will likely only go up as the invasion of Ukraine continues. In order for gas prices to reach record-setting levels, it’ll need to average more than $5 per gallon across the country. This will likely mean that states like California and Hawaii will see prices closer to $7 per gallon. Even at that point, fuel efficiency has improved enough such that the gallon of gasoline you buy today will take you more miles than it did back in the 1980s.
The highest and lowest average prices for a gallon of gasoline is in California at $5.74 and Kansas at $3.81 [AAA]
In December 2021, the US imported 6.422 million barrels of oil with 4.085 million barrels coming from Canada [Energy Information Administration]
The US produced 10.2 million barrels of oil per day in 2021, the most in the world. Russia is the second-largest producer at 9.7 million barrels per day [CNN]
Based on data from December 2021, 33.3% of the value of Russian exports were from crude and refined petroleum [The Observatory of Economic Complexity]
In the 4th Quarter of 2021, Americans allocated about 17.4% of their total expenses on housing and utilities and 16% on healthcare [Bureau of Economic Analysis]