August
28, 2003, 9:30 a.m. The
Pump Jump — in Perspective
Gasoline
is still affordable in historical terms.
By
Stephen Moore and Phil Kerpen
ith Labor Day upon us and gas prices reaching $1.79 a gallon in many markets
and even topping $2.00 a gallon for premium unleaded, newspapers have
been full of headlines about “record prices.” But the talk about record
highs is based on a common economic fallacy — a failure to adjust
for inflation over time. General inflation raises the overall level of
prices throughout the economy. The real issue is whether gasoline prices
are rising relative to the other costs of goods and services. And if we
measure energy and gas prices correctly, we find that gasoline —
although the price has risen by more than 20 percent in recent weeks —
is still affordable in historical terms.
The
Energy Information Administration reports gasoline prices in both nominal
and real terms. The real prices are adjusted for the effects of inflation
by applying the implicit GDP price deflators to compare prices in constant
1996 dollars. The current “record high” price is quite moderate by historical
standards. We had higher retail gasoline prices as recently as 1985, and
significantly higher prices from 1979 to the mid 1980s. (Click
here for chart.)
The late great economist
Julian Simon, a Cato Institute adjunct scholar, was famous for teaching
us that it is most important to look at the very-long-term trends in prices
of natural resources, if one wants to make predictions about the future.
Here is what Simon’s long-term data on energy and gas prices tells us:
Gasoline prices paid at the pump have been on a steady rate of decline
since the 1920s, with the obvious exception of the 1970s, when we faced
an OPEC embargo and gasoline lines. In 1920 the real price of gas (excluding
taxes) was twice as high as today. If the price of gasoline relative to
wages was comparable today to what it was in 1920, we would be paying
almost $10 a gallon for gas. (See The State of Humanity<>, by Julian
Simon, Blackwell Publishers, 1995, Chapter 28.)
The same is true,
by the way, for the cost of electricity and oil. Oil is slightly cheaper
today adjusted for wage growth than it was 50 years ago and five times
cheaper than 100 years ago. Electricity to our homes is about one-half
as expensive as 50 years ago, and despite the recent blackouts, the service
is more — not less — reliable.
Time magazine
recently published a major story warning that the world is running out
of energy. The authors of that story, Donald Barlett and James Steele,
are completely misinformed. Given new technologies in the energy industry
and the new oil deposits being found in Russia and other nations around
the world, the likelihood is that prices of gasoline, oil, and electricity
will fall throughout the 21st century, just as they did in the 20th. If
Julian Simon were still alive, he would gladly bet Barlett and Steele
or any other pessimists a tidy sum that prices will fall, not rise, over
time. He has at least 100 years of history on his side. And he never lost
a bet.
One last word on
the rising cost of gasoline. American motorists should be mighty pleased
that the United States does not adopt the economically dysfunctional high-energy
tax policies that are commonplace in Europe. In the Euro nations, gasoline
often reaches $4 a gallon with more than half the price collected in taxes.
Perhaps $2 a gallon gasoline is a bargain after all.
—
Stephen Moore is a senior fellow at Cato
and is president of Club for Growth. Phil Kerpen is a research assistant
at Club for Growth.
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ith Labor Day upon us and gas prices reaching $1.79 a gallon in many markets
and even topping $2.00 a gallon for premium unleaded, newspapers have
been full of headlines about “record prices.” But the talk about record
highs is based on a common economic fallacy — a failure to adjust
for inflation over time. General inflation raises the overall level of
prices throughout the economy. The real issue is whether gasoline prices
are rising relative to the other costs of goods and services. And if we
measure energy and gas prices correctly, we find that gasoline —
although the price has risen by more than 20 percent in recent weeks —
is still affordable in historical terms.
