Economic Impact of Gas Prices

Are gas prices high or low by historical standards?  That seems like a nutty question, with prices at the pump cracking $4.00 a gallon, but one can argue that in terms of household pain, gas prices are nowhere near their historical highs.

Economist Mark Perry, at his blog Carpe Diem, shows that gas prices are far from their highs as a percentage of household income:
Gas

I thought the analysis could be taken one step further.  Mr. Perry was generous enough to send me his data, and I added a fourth piece of data to the analysis:  the average passenger vehicle MPG by year, as reported at the BTS here.  The MPG data set is spotty, and required some interpolation.  Also, data since 2004 is missing, so I assumed 2004 MPG's for more recent years (this is conservative, since the long-term trend would indicate fleet MPG's probably improved since 2004). 

From this data I was able to create what I think is a slightly improved analysis.  The key for households is not how much it costs to buy 1000 gallons, but how much it costs to buy the gas required to drive their typical annual miles.  Using 15,000 as an average driving miles per year per person, we get this result:

Gas_prices_2

So, while I too think paying $4 for gas is not my favorite way to dispose of my income, in terms of average household pain created, gas prices are quite far from their historic highs.

  • CRC

    While I can't support or dispute your data, you make an extremely key point which is: "The key for households is not how much it costs to buy 1000 gallons, but how much it costs to buy the gas required to drive their typical annual miles."

    More generally, regarding any good or service we purchase, this could be stated as:

    The key for households is not how much it costs to buy X, but how much it costs to accomplish Y.

    Where X is the thing(s) we buy (e.g., fuel, food, movie tickets) and Y is the thing we want to achieve (transport from one place to another, hunger abatement, entertainment).

    People too often focus on the middle piece. I'd love to see more analysis on this across other goods and services.

    I've heard there is a book where something quite similar has been done by looking at hours worked to obtain X good over time (i.e., over the course of our country's history)...and the numbers look very good despite our American penchant for pessimism.

  • Dr. T

    ...gas prices are quite far from their historic highs.

    The analysis would have looked even more impressive if you had gone back to 1970 so that the 'gas crisis' of 1974 would be in the data.

    I know of few families that are driving less because of today's gas prices. There's lots of griping and far too much of "the government should do something about this" whining, but I don't see families trading in their Nissan Armadas for dinky little hybrids.

  • Streaker

    OK, but what's the point? Gas doesn't, as a whole, take up as much disposable income as it has in the past?

    So, what?

  • Steve

    ...and that's to drive heavier, safer, more powerful, more luxurious cars that pollute less...

    "So, what?"

    So, the sky isn't falling.

  • Steve

    ...and that's to drive heavier, safer, more powerful, more luxurious cars that pollute less...

    "So, what?"

    So, the sky isn't falling.

  • Bill Lever

    Interesting as usual. Thanks.

    I liked your idea to control for the MPG of cars.. and I wonder if one more variable - namely the actual miles people drove in 1980 vs now-- might show a more basic feature of human behavior regarding family budgets?

    I suspect we might find that people have spent close to the same percentage of overall income for transportation over time. They can adapt and transportation is not a priority in itself.

    I would be interested in a timeline of budget items over history (How we spend our money these days and how people spent their time in pre-monetized life).

    The big declines in percentage are probably Food and Heating Fuel. The replacement budget items have probabaly been Entertainment, Education and Medical care. Shelter, Transporation and even Law and Order might be relatively constant percentages over time.

    Recent growth in Government Tax as a budget item is just because government is providing more services than in prior eras... eg. Social Security for your granny, so she's not your problem these days.. (Not that everyone agrees that more government is a good thing, or cheaper, or without some adverse side effects.)

  • Jim Hart

    Relativism? We aren't quite as "un-free" as we were back in England? The problem with this as in other situations is that the Fabian Socialists still think they know better what is good for us than the free markets. If Gas prices were this high as an affect of free markets, nobody would be wincing. They are not.

  • Bob S

    A great, great post. It shows how delusional our public debates really are. Here's a question, can a political system that is delusional long endure?

    I bet that if the data were extended back to 1960, our current problems would look even smaller.

  • BlacquesJacquesShellacques

    Can you shade it or otherwise mark it to show which party controlled congress and/or the white house? Correlate with the US dollar? Tax rates?

  • JIMS

    Do most people really rack up 15k miles? How? My worst year I drove around Seattle every day as a sales rep, drove the same car to Atlanta to see my sister, and hit 13k miles. I just don't see how most people need to drive 15k miles per year. Do most people try to live as far from work as possible.

  • Ryan

    "Do most people really rack up 15k miles? How? My worst year I drove around Seattle every day as a sales rep, drove the same car to Atlanta to see my sister, and hit 13k miles. I just don't see how most people need to drive 15k miles per year. Do most people try to live as far from work as possible."

    Yes. The average commute is around 15 miles one way. In your worst year you averaged driving about 41 miles per work day if you walked to the grocery store and movie theater and never did any other driving at all. Not much of a sales route.
    You are right though, most people don't "need" to drive 15k miles. All we "need" is to grub around for roots and berries for 35 years and then die when the drought hits.
    Seriously, most people have a lot of factors driving their choice of location. Distance from job is just one of many.

  • Dan

    The funny thing about looking at that graph is that if you remember, in 2000 (when the cost to drive 15k miles was about half of where it is now), people were complaining about high fuel costs and petitioning politicians for a tax holiday on gas (there actually was one enacted here in Illinois in the summer of 2000). Ah, those were the days - when we could complain about gas at $1.65 a gallon.

  • DKH

    The driving route for my summer job is about 55 miles, one way. This is not really by choice, and it certainly leads to a lot of carpooling. But there aren't many housing options closer, at least for temporary living. Point is, there are some jobs that will require a lot of driving. Not everyone has an inner-city office job.

  • Jessica

    I think Steve makes a good point. And along those lines- with the current state of the job market, people may be having to drive more miles to their jobs(if jobs are less available, convenience of location may be less of an option). I would be interested to know if the number of miles people are driving to work has changed over time.

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