5/01/04

Gas prices are reported to be at record highs.
Drivers say higher gas costs mean they’ll have to cut back on other spending. Businesses say they can’t absorb higher gas prices forever without increasing their prices.
Has it ever been worse?
Actually, it has. Comparing the pump-posted gas price isn’t the best way to gauge how costly gas is in different years, because the dollar’s value changes over time.
Here’s what I mean: Most prices rise yearly; that’s why we have inflation, which erodes the dollar’s purchasing power, meaning a dollar buys fewer consumer products and services. An alternative way to measure gas prices (or any other price, for that matter) is to calculate how many other consumer products and services you can’t buy if you use your dollars to buy gas.
By this measure, gas prices would have to rise above $2.50 per gallon to beat the standing record, set in 1981.
Another way to measure gas costliness is to ask how many minutes you must work to earn enough for a gallon. Today, it’s 11.4 minutes. In 1981, it took 18 minutes. According to this measure, gas prices would have to rise above $3 per gallon to set a new record.
These alternative measures showing gas prices not at record highs are of little consolation to families paying more at the pump. Nobody likes to fork over $25 to fill his or her tank, when last year it took $18.
But just how devastating are higher gas prices to families? Today’s average household, earning $35,000, spends 4.7 percent of its income for gas and motor oil, about the same as on furniture and appliances. However, since gas is treated as a “necessity” — that is, gas spending doesn’t rise as fast as income rises — gas costs are a greater burden for low-income than for higher-income households
Households earning only $12,000 spend 7 percent of that income for gas and oil. In contrast, households making $60,000 spend 3.5 percent; households pulling in $115,000 spend 2 percent.
Could high gas prices cripple the economy, just as it appears to have turned the corner and is creating jobs?
If it were 25 or 30 years ago, the answer would be yes. Yet, despite the fact that we’re still an oil- and gas-based economy, we’re less harmed by higher gas prices because we use oil and gas more efficiently today.
It takes half the amount of energy today to produce a dollar of output in the economy compared to 30 years ago. Also, even with all of today’s new computers and audio-visual products, energy consumption per person has been stable for 20 years and is lower today than in the late 1970s.
Still, every 10 percent permanent gas price increase today reduces economic growth by .15 percent.
So if the 30 percent gas price increase over the past year is permanent, this would shave about half a percentage point off national economic growth. For example, the economy would grow at 4 rather than 4.5 percent; significant, but not devastating.
Although we don’t like higher gas prices, it could be worse, and indeed, has been. Maybe that will make you feel a little better about what you’re paying at the pump! You decide.

EDITOR’S NOTE — Dr. Mike Walden is a William Neal Reynolds professor and Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy.