Are US gasoline pump prices actually high?
David Simpson posted on November 24, 2014 |
There is a lot of discussion today about how expensive the pump price of gasoline is in the U.S.  These conversations range from “the reason for the recession is high motor fuel prices” to “prices have increased 3 fold during the current administration”.  It is true that in December, 2008 the price of a gallon of regular unleaded gasoline dipped to $1.69 in major U.S. urban areas, and in September, 2012 it had increased to $3.86/gallon—closer to twice than three times, but the claim is still on point.  The real question is “does doubling of the price of a commodity over 6 years define the higher price as “expensive?”  The answer is “not by itself; you have to look at the number in context.”

  

Figure 1  Current price of selected commodities
Figure 1 Current price of selected commodities


Comparing prices of consumer items over time is a very complex and technical subject.  For every question there are a range of answers and a lot of disclaimers and assumptions.  I like to boil the discussion down to constant-property commodities.

While a gallon of gasoline in 1950 contained lead and did not contain ethanol, the bulk properties of the two fluids are very similar and are largely interchangeable. 

A gallon of homogenized whole milk in 1950 would have been very similar to a gallon of homogenized whole milk in 2014 (packaging is the biggest difference).  While it is common for older people (like me) to complain that a slice of bread today is far less satisfying than a slice of bread from our youth, the differences reside more in our recollection than in fact—the make-up of a 1 lb loaf of sliced white bread is largely unchanged since the 1950’s.

So if I compare the price of a gallon of milk over time or the price of a loaf of bread over time to the price of a gallon of gasoline, I can draw some meaningful conclusions.

Supply and demand impacts on prices

Looking at the period before 1950, it is difficult to make much sense out of the price of gasoline.  Before WWII there weren’t very many paved roads in the U.S. outside of cities and not many cars on the roads that did exist.  During WWII, there was rationing to make sure that vital commodities like motor fuels and rubber were available for the war effort.  After WWII industries took some time to come off a war footing so starting the analysis in 1950 gets rid of most of the major external factors from the previous periods.

Between 1950 and the Arab Oil Embargo in 1973, the price of motor fuel was dominated by supply and demand to a greater extent than at any time before or since.  In 1973, the state and federal governments began to see motor fuel as an economic lever that they could pull to “manage” the economy.  From 1973 to today, supply and demand have had a diminishing impact on the price of motor fuel.  With hydrocarbon products the politicians have a key lever for price manipulation through their day to day control over imports and exports.  The export ban that is currently being discussed in the media and in Congress has had the effect of reducing the ability of the global market to move supplies of both crude and refined products from places of plenty to places of need.  The result of that is the price volatility that you see in Figure 1.

 Milk and bread are a bit less subject to price manipulation by politicians than motor fuel is.  Most of the raw materials for these commodities come from very local sources so the only price manipulation lever that politicians have are the “farm subsidy” programs.  These subsidies have artificially supported high prices, but the amount that prices are elevated seems to be fairly minor—a drought year (or several), a wheat blight, or a cattle disease can be seen in the prices, so supply and demand are still a significant factor in these commodities.


Figure 2  Homogenized price of selected commodities
Figure 2 Homogenized price of selected commodities


Alternate means of evaluating the price of motor fuels

If you can accept that the price of milk is controlled to a significant extent by supply and demand, then it is a small step to ask the question “If I have the price of one gallon of milk in my pocket, how much gasoline could I purchase?”  In 1939, a gallon of milk cost $0.30 and a gallon of gasoline cost $0.16—so the answer to the question is “1.87 gallons of gas can be purchased for the price of one gallon of milk”.  By 1950, the price of a gallon of milk had risen to $0.52, but a gallon of gasoline was up to $0.24, so the answer was “2.18”.  By the time of the Arab Oil Embargo the relationship was still over 2.0 at 2.48 gallons of gasoline for the price of a gallon of milk.

Based on the years before 1973, an argument can be made that without government involvement in motor fuel prices, a gallon of gasoline should be about half the cost of a gallon of milk.  Figure 2 shows that this has rarely been the case since motor fuel became a tool in government policy.  Today, the price is often the same between the two commodities.

What price would be appropriate on a historical commodity basis?

Milk prices have been volatile over recent years.  This has been due to environmental factors like droughts, diseases in the herds, and price pressure on cattle feed due to ethanol production.  It is reasonable to look at another commodity that is little changed from year to year like bread. 

If you were to define “appropriate” price for regular-grade unleaded gasoline as falling into the range that it was in during the 1950-1973 period then using a milk model (today’s milk price $3.49/gallon) the price should be around $1.75/gallon.  Using the bread model (today’s bread price $1.98/loaf) it should be below $3.30/gallon.  Actual price in my home town as I’m writing this is $3.09/gallon.

So, if we compare the price of gasoline to milk, gasoline is very expensive.  If we compare the price of gasoline to bread, it is appropriately priced.


Figure 3  After tax hours/week to purchase gasoline
Figure 3 After tax hours/week to purchase gasoline


Do gasoline prices impact behavior?

It is hard to say with certainty whether either of the proxies discussed above represent a good representation of “expensive”. 

If we look at gross household median income and compare it to the vehicle data that the U.S. Department of Energy compiles then you can look at the price of motor fuel relative to family income.  The linked dataset includes miles per vehicle, miles per gallon, and has the data to derive vehicles per household.  This gives us a cost/year.  Comparing that to median household income yields Figure 3.

 

 Unfortunately, the data from 1950 to 1970 does not exist, so it is difficult to define a “normal band”.  Looking at 1970-1973 which seems quite stable and based on the discussion above it might be a viable surrogate for “normal”.  If it is reasonable to spend 3 hours of effort per week on motor fuel, then you might think that 4.6 hours was expensive enough to cause you to cut back on your driving. 

In 1970 the average household had 1.55 vehicles that were driven 10,272 miles/vehicle.  In 2012, the

Figure 4  Bicycle parking at train station (Oxford, England)

Figure 4 Bicycle parking at train station (Oxford, England)

average household had 2.08 vehicles that were driven 12,928 miles/vehicle.  In 1970 a median household would spend 3 hours of work per week to purchase motor fuel and in 2012 it was 4.6 hours—a 50% increase in real effort required to purchase motor fuel while increasing miles driven by 69%.


If you can define “expensive” as “that point where further increases in price would cause a change in behavior”, then you have to think about what a change in behavior would look like. 

European governments saw the cost of motor fuel as a significant drain on their foreign trade balance and took steps over the last few decades to limit the drain.  Many countries have imposed taxes on motor fuels that make the price nearly twice the U.S. price.  In those countries we tend to see:

·         Viable and safe public transit systems

·         Public transit plans for suburbs as part of the development plan

·         Smaller vehicles

·         An increased use of public transit, carpooling, and bicycles for commuting to work

In 2013, the top selling non-fleet vehicle in the U.S. was the Ford F-Series pickup (which sold nearly twice as many units as the next best seller, the Chevrolet Silverado pickup).  28 percent of the top 20 new car sales of 6.2 million units had fuel efficiency worse than 20 mpg.  In the top 20 there were four pickups and several luxury (high power) sedans and SUVs.  The Toyota Prius was number 16 with less than 4% of the top 20 total sales.  There were no electric vehicles in the top 20.

Public transit systems in the U.S. are required to show a profit with a rapid amortization of capital costs.  In many U.S. cities public transit is quite dangerous.  There is little evidence that motor fuel prices have done anything to reduce the growth rate of urban sprawl even in the absence of safe, reliable mass transit.

What does it all mean?

Between 2002 and 2012, the price of motor fuel at the pump more than doubled.  In the same time period total miles driven increased about 0.4 percent per year, which is slower than population growth, so the per capita change was about 14 per cent reduction in miles driven over ten years (1.7 per cent annual reduction).  This indicates that fuel price is not a dominant driver of fuel consumption in the U.S. at current prices.  That can be restated as “motor fuel is not expensive”.

It is clear that in spite of vociferous and frequent complaints, the American people do not find motor fuel to be expensive enough to significantly alter their behavior—we obviously do not find motor fuels to be expensive beyond giving lip service to the common bogeyman.

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