Is Gasoline Becoming Unaffordable?
Not if you can remember the world before COVID.
In 1960, gasoline cost $0.31 per gallon. Isn’t it outrageous that it costs more than $0.31 today?
If you think that’s a ridiculous statement, you might be as exasperated as I am with the media coverage of the gas prices over the last month. The standard story breathlessly tells us that the California price has hit a new record, or that the average price in the US is much higher than it has been in recent years. Very occasionally, it might even include a graph similar to this one showing the average price over many years. (Details on all the data/calculations in this blog are at the end.)
(Source: Author Calculations from EIA data)
But if you are not outraged that gasoline is more than $0.31 per gallon today, you probably realize that the graph above is not telling the whole story. A lot has happened to prices of other stuff over the decades. If you ignore that fact, then everything seems unaffordable today, whether it’s food or housing or a haircut, or even a Thanksgiving turkey. What is clear from the graph above is that gasoline prices have gone up a lot since they bottomed out in the first couple months of the pandemic.
The real story
Adjusting the gasoline price data for inflation, of course, produces a less media-friendly storyline, as the graph below shows.
(Source: Author Calculations from EIA data. All prices in Nov 2021 real dollars)
US and California real (i.e., inflation-adjusted) gas prices are nowhere near all-time high, at least a dollar lower than just before the financial crisis tanked the economy in 2008, lower than during many of the recovery years after that crisis, and only slightly higher than they hit in the year or two before the pandemic.
Sure, they are much higher than they were in the depth of the pandemic depression, BECAUSE NO ONE WANTED TO BUY GAS THEN. Uh, sorry for yelling. But shouldn’t it be pretty obvious that the price of a good when demand suddenly drops by half isn’t what we should be expecting for the long run.
Protecting vulnerable households
Some will respond by pointing out that people who can barely afford to buy gas at all get hammered when its price is high, and they need some help. I agree completely. But focusing on the price of gasoline obscures the larger social issue. The problem is rising income and wealth inequality, which makes everything harder to afford, including housing, food, and, yes, gasoline. Unlike housing, however, as the graph above shows, gasoline prices haven’t actually risen much in real terms over the last 17 years. What we need to address is the everything affordability crisis for people being left behind, with stronger social programs, educational options, and job opportunities.
We don’t need to address the gasoline “affordability crisis” for everyone else. State and federal governments have many public policy imperatives to confront. Artificially lowering the price of climate-changing, polluting transportation fuels for people who think gasoline should never cost more than $1 or $2 or $3, or $0.31, is not one of them.
Gasoline in the household budget
For the majority of households, not only is gasoline still affordable, it’s no more strain on the budget than it has been in most recent years. Because, while real gasoline prices are higher now than in some past years, so are incomes. If you are an average household and have to buy (slightly more than average) 3 gallons of gasoline per day, how much of your income does that take? The graph below shows that even with the run up in 2021, the share today is somewhat lower than the average over the last 17 years and much lower than just before the financial crisis or during the recovery from it.
(Source: Author Calculations from EIA and US Census data)
So, although gasoline has become less affordable to those whom society is leaving behind, it has not become less affordable to the median household.
Interestingly, the graph above also shows that while California gasoline has been more expensive during these years due to higher taxes and environmental fees, until the Mystery Gasoline Surcharge appeared in 2015, buying those 3 gallons daily ate up about the same share of income in California as in the rest of the country. The higher median income in California almost exactly offset the higher gasoline prices before 2015.
Rising fuel efficiency
But another thing has been changing over these years. Cars. They have been getting more fuel-efficient even as they have also been getting fancier and heavier. Over the 17 years shown in these graphs, average fuel economy for cars and light duty trucks has risen from just below 20 MPG to just above 25 MPG. A 1000 mile driving trip doesn’t take as many gallons of gas, so it doesn’t take as many hours of work to pay for it. How many hours? I’m glad you asked. Using the national average MPG, the graph below shows that other than during the pandemic – when we weren’t going on many trips – it takes about the same or fewer hours of work to buy the fuel for that vacation now than in nearly all past years.
(Source: Author Calculations from EIA data and Bureau of Labor Statistics data)
The graphs I’m showing start in 2005, because that is the earliest year for which it is straightforward to make the data series comparable. But in case you think that is hiding some different story, here are annual average nominal and real gasoline prices back to 1929. Real prices this year are not nearly as low as 1998, the cheapest gas ever, but they are about the same as 1960, when gas cost $0.31 per gallon. And that’s even before accounting for huge increases in household income and fuel economy since then.
(Source: Author Calculations from EIA data, 2021 price is average year to date)
Nonetheless, voters love to hate rising gas prices, so politicians love to “do something about it.” The usual something is releasing oil from the Strategic Petroleum Reserve, as President Biden ordered last week. The most optimistic research, however, suggests that it has modest, if any, effect on crude oil prices.
Still, that’s more than the other something: launching an investigation by the Federal Trade Commission into gasoline market competition. The basis for the FTC inquiry is that crude oil prices have fallen over the last month while gas prices have barely budged. But it has been known for at least 25 years that gas prices follow crude drops with a lag that is typically more than a month. Like nearly every economist who studies these markets, I expect the FTC study to end with a quiet whimper.
But there are a couple of reasons for optimism. First, oil prices had dropped a bit in November even before they declined more steeply on Friday with news of the Omicron COVID variant, so gasoline prices are very likely to decline in the coming weeks. In fact, the U.S. average price has dropped a couple cents in the last week.
More importantly, there is something we can do that would be much more effective in lowering gas prices: use less gas. Individually, we can save money by buying more fuel-efficient cars, or cars that don’t use gasoline at all. Collectively, policies that reduce gasoline use will reduce market demand, and that could crater gas prices. Those lower prices will make it harder to quit fossil fuels, but there are certainly worse problems to have than low prices if they are caused by weak demand.
I tweet energy news/research/blogs and occasional political views @BorensteinS .
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas
Suggested citation: Borenstein, Severin. “Is Gasoline Becoming Unaffordable?” Energy Institute Blog, UC Berkeley, November 29, 2021, https://energyathaas.wordpress.com/2021/11/29/is-gasoline-becoming-unaffordable/
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Data Construction Notes:
Monthly U.S. retail gasoline price data are from
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epmr_pte_nus_dpg&f=m
Monthly California retail gasoline price data are from
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epmr_pte_sca_dpg&f=m
For both series, November 2021 price was not available. I constructed it by taking the October price and adding the month-over-month differences on the AAA price website as of November 25, 2021.
Real prices are based on the Consumer Price Index
https://data.bls.gov/timeseries/CUUR0000SA0
November CPI was not available, so I assumed that the inflation rate from September to October continued from October to November.
The long series of annual US retail gasoline price is from
https://www.eia.gov/dnav/pet/PET_PRI_GND_DCUS_NUS_A.htm
Leaded regular gasoline price used up until 1990
Unleaded regular conventional gasoline used 1990-2011
All regular gasoline used 2012-2021
2021 constructed from year to date average of EIA monthly data
US Census US annual median household income from
https://fred.stlouisfed.org/series/MEHOINUSA646N
US Census California annual median household income from
https://fred.stlouisfed.org/series/MEHOINUSCAA646N
2021 data not available. Median household income assumed to grow at CPI from 2020.
US Census US monthly average hourly earnings from
https://fred.stlouisfed.org/series/CES0500000003
US Census California monthly average hourly earnings from
https://fred.stlouisfed.org/series/SMU06000000500000003SA
November 2021 data not available, assumed to grow from October 2021 at CPI from September to October 2021. Marginal Federal+State tax rate assumed to be 25% for US, assumed to be 29% for California.
US annual fleet fuel economy data from
https://www.epa.gov/automotive-trends/explore-automotive-trends-data
All Regulatory Class, All Vehicle Type
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Severin Borenstein View All
Severin Borenstein is Professor of the Graduate School in the Economic Analysis and Policy Group at the Haas School of Business and Faculty Director of the Energy Institute at Haas. He received his A.B. from U.C. Berkeley and Ph.D. in Economics from M.I.T. His research focuses on the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. Borenstein is also a research associate of the National Bureau of Economic Research in Cambridge, MA. He served on the Board of Governors of the California Power Exchange from 1997 to 2003. During 1999-2000, he was a member of the California Attorney General's Gasoline Price Task Force. In 2012-13, he served on the Emissions Market Assessment Committee, which advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. In 2014, he was appointed to the California Energy Commission’s Petroleum Market Advisory Committee, which he chaired from 2015 until the Committee was dissolved in 2017. From 2015-2020, he served on the Advisory Council of the Bay Area Air Quality Management District. Since 2019, he has been a member of the Governing Board of the California Independent System Operator.
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I can remember my dad refusing to pay $0.21 a litre for petrol back in the late 70’s. Good times.