Tuesday, January 17, 2006

Real Gasoline Prices

Last year, when the hurricanes helped push gasoline prices to their highest nominal levels in US history, many analysts suggested that we needed to look at this in terms of real dollars, which was only marginally higher than the previous record of the early 1980s. But it occurred to me that however accurate that might be as economics, it doesn't really reflect the way consumers think about prices. Many of us carry around a set of internal references about what things should cost, based on some period in which we focused on them. That would mean that there isn't any absolute sense of high and low prices, even within the same economic stratum, and that could have interesting policy implications.

The older I get, the more I notice myself comparing the prices of things to what they were when I was younger--a habit for which I used to chide my parents. On this basis, a carton of milk shouldn't cost $3, and a perfectly ordinary house has no business selling for more than a million. Gasoline is the most visible price in our economy, but have we really absorbed the way it has gone up and down over the years, relative to other things we buy?

For example, I can remember service stations posting prices of $0.359/gallon in the late 1960s and early 1970s (though it would occasionally drop below 30 cents during "price wars.") How do today's prices compare? Using the Consumer Price Index as a measure, that translates to about $1.90 in 2005 dollars. By the time I bought my first car in 1974, gas had jumped to about $.50/gallon, but that still equates to $2.00 now. In fact, when you look at historical gasoline prices converted to 2005 dollars, you see that from the end of World War II until the Iranian Revolution in 1979, gasoline averaged about $2.00/gallon. From then until 1985, it was around $2.50, hitting a high of $2.92 in 1981. And then from the oil price collapse in 1986 until 2004, it averaged $1.50/gal--coinciding with the rise of the SUV trend.

As a result, today's price of roughly $2.40 looks either in-line or out-of-line, as a function of which period you paid more attention to. And by extension, a $1.00/gal gasoline tax hike to spur efficiency would make the fuel seem twice as expensive to some of us, but only a bit pricier than usual for others. So if prices continue to drop from here, that could open up policy headroom for new gas taxes, while simultaneously reducing the effectiveness of a higher tax, depending on the individual perspectives of consumers.

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