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Real Gasoline Prices have fallen over the past 60 years

by KRXA Hal 4/24/2009 - 9:46 pm   |

I  must admit that my claim in an early blog thread that the real price of energy has not changed in 50 years was incorrect.  Over the past 60 years, the price of a gallon of gasoline adjusted for inflation has actually fallen significantly.  Thus, any argument that our country's economic strength in the 50s and 60s was due to cheap energy should be reconsidered.

The following fascinating analysis can be found at http://www.measuringworth.com/uscompare

The "real" price of gasoline: Gasoline cost 27 cents a gallon in 1949 compared to around $4.00 today.* How has the relative cost of buying gas changed over the last 59 years? Presented here are two tables computing the annual "real" cost using our five indicators, one in 2007 dollars, the current number used for real GDP, and the other in 1949 dollars. While the two tables show the same trends, they do give a different perspective.

Using the 2007 table and the CPI and the GDP deflator, we see that gasoline was quite expensive in 1980 and 1981 and the cheapest in 1998 and 1999. Today, the real price using these two measures is higher than the period at the beginning of the 1980s.

By looking at the share of the Consumer Bundle and GDP per capita, the story is a bit different. In 1981, a gallon of gas took as much out of what the average consumer spent as $4.00 does in 2007. And as a share of GDP per capita, gas was even more expensive in those earlier days with it at over $4.50 in 1980 and more expensive in the earlier years.

The other table tells the story in a different way. Let us look at relative cost to an unskilled worker to fill up using 1949 dollars. That year the 27 cents it cost for a gallon of gas, took a certain share of the worker's wage. The interesting question is, has the cost as a share or percent of the worker's wage increased or decreased over time? The table shows that for the wage rate and price of gasoline in other years, this cost has fallen. Since wages have increased faster than the price of gasoline, by 2007 an unskilled worker spends only two-thirds as much, as a percent of wage, for a gallon of gasoline than the 1949 worker. The table shows that the $2.85 a worker paid in 2007 would be comparable to only 20 cents (in 1949 prices "share" of the wage.

When we use the GDP per capita, the cost has fallen faster. Looking at the table shows that a gallon of gasoline costs around 11 cents a gallon (in 1949 prices) if measured as a "share" of the GDP per capita. This is because in 1949, 27 cents was .015% of per capita GDP, while in 2007, $2.85 was .006%.

Finally, comparing its cost as a share of GDP, we see that in 1949 prices, it is about 6 cents. This means that a gallon gasoline was a four and a half times larger share of output in 1949 than it is today.

Interesting and, to me, unexpected. Here's another article about it. This one doesn't get into per capita GDP but notes that taxes are a lot higher now, approx. 20% vs. 1.5% in 1950. So the pre-tax cost of gasoline is even cheaper today.

by Genghis 4/24/2009 - 11:44 pm

While interesting, this analysis has little to do with what we were discussing.  First, you claimed that raising the top marginal tax rates will make for better economic outcomes and that the higher tax rates of the immediate post-war era were the reason for the economic conditions of the day, which you imply were favorable to today's conditions.  My rejoinder had two parts:

  1. Raising the top marginal tax rates will not make the economy grow and were not responsible for the economic conditions of the 50s and 60s.  Raising these rates could conceivably raise government revenues (though this isn't always the case), but taxes create a downward pressure on economic growth, a concept that you seemed to understand in your last post.
  2. If you want to identify factors that are key to the economic growth in America during the 20th century, look at cheap, abundant petroleum energy for a start.

These two statements:

Over the past 60 years, the price of a gallon of gasoline adjusted for inflation has actually fallen significantly.  Thus, any argument that our country's economic strength in the 50s and 60s was due to cheap energy should be reconsidered.

Have little to do with each other.  That the real price of oil hasn't not changed drastically over the last half-century or so has nothing to do with the fundmental influence of energy inputs on economic growth.  Furthermore, we can see here that the real price has most certainly increased.  However, what is more to the point is exactly how well spikes in the real price correspond to economic downturns.  This is what we would expect to see if petroleum energy is a key input, which, as I argued, it is.

The one thing that is significant in the time that you can chosen, namely 60 years ago or around 1950, is that this is when oil overtook coal at the world's foremost source of energy.  This is no coincidence and goes directly to support my argument.  This graphical view shows a nice flat period in the price of oil during the 50s and 60s.

Cheap oil made possible the rapidly expanding auto industry, agribusiness, plastics and the suburban infrastructure model.  To misundestand this is to misunderstand one of the chief aspects of economics in the last half-century.

by DF 4/25/2009 - 8:56 pm

Good comment.  The question is what to do now.

by Articleman 4/26/2009 - 10:45 am (re: DF)

It's a vexing question.  If I were the Decider, I would be looking at infrastructure that is rather unpopular on the left: Nuclear power.  The reasons for this have more to do with coal, but a nuclear powered grid would make owning an operating an electric car, whether using hydrogen fuel cell technology or something other energy storage solution, more affordable than the costs of owning an operating your standard issue internal combustion vehicle.  Nuclear energy is so cheap to produce that in some cases it's hardly even worth the cost of billing customers for it (because this requires staff to meter and bill the electricity produced by the plant).

There are certainly issues with nuclear power.  For one, uranium is also a finite resource, though we can recycle a good deal of fissile material (in some cases up to 90% or more).  There are, of course, waste storage and disposal issues with nuclear energy.  This is one of the chief obstacles, the other being plant management, which is almost always the root cause of failure events.  However, nuclear power offers us something that no alternative presently can, which is the ability to supply us with as much (or more) energy as does coal.  This is very significant, since nearly half of the electricity on our grids comes from coal, but it would also make electricity an incredibly affordable (and therefore realistic) option for powering transportation.

Most of the other things that I would do, like high-speed rail, are already being done by the Obama administration.  On the economics front, I think they've also largely got all of their ducks lined up, with the exception of the banking situation.  I think it's still too early to know much about what they'll do with trade and what those outcomes will be, but I think they're moving in the right direction on fiscal issues.

The other big issue, with respect for petroleum, is argiculture.  Technological innovations like vertical farming are promising, but largely untested.

by DF 4/26/2009 - 11:50 am (re: Articleman)

Though it pains me to admit it, the gasoline price line does support DF's argument that it was low and stable gas prices that drove the strong American economy of the 50s and 60s.  It is especially painful because DF uses this fact to dispute my broader point that high marginal taxes and intelligent trade policy as opposed to "free trade" are essential if we are going to move America forward.  In fact, the gyrating and generally upward trend in relative energy prices since the early-70s make it all the more essential that we improve the environment in American for manufacturers by 1) redistributing wealth from those who would save and invest it to those who will spend it and 2) incentivizing the purchase of domestic goods by hiking the price of imports through tariffs.  Moreover, I am completely befuddled as to why DF would dispute this.

by KRXA Hal 4/26/2009 - 10:48 am

I think DF is saying higher marginal rates can raise revenue, albeit at the cost of reducing growth, not that he necessarily opposes that, so I don't think you two are disagreeing as much as you think.  I guess I missed the exchange on tariffs.

by Articleman 4/26/2009 - 11:11 am (re: KRXA Hal)

I'm befuddled as to why you think I disagree with you generally.  I tried several times in the last thread to impress upon you that I do not disagree with raising the top marginal tax rates.  In fact, I even linked to a Jeff Sachs essay that explains quite plainly the arguments for doing this from a public economics perspective.  "Intelligent trade" is a bit of a loaded phrase, but I'm sure we would find at least some agreement there as well, as I think there is plenty of room for criticism of the policies that have thus far flown under the banner of "free trade".

Where I've disagreed with you is some of the nuance and detail surrounding tax policy.  One of these nuances, supported by Jeff Sachs and other sympathetic economists, is that raising the top marginal tax rates alone will not provide us with the means to pay for all of these initiatives, particularly health care.  That does not mean that I'm saying we shouldn't do it.  Far from it.  There are a plethora of compelling reasons to do it, if even only to bring the cost down to be competitive with what other industrialized nations are paying.

by DF 4/26/2009 - 11:29 am (re: KRXA Hal)

Okay.  Thanks guys.

by KRXA Hal 4/26/2009 - 12:12 pm (re: DF)

Hi

This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone

scott

<a href=http://www.officepoliticsuk.com>office politics uk</a>

by Thomas (not verified) 4/28/2009 - 2:12 am

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