Gas prices are back in the news

Posted by Don Fullerton on Mar 11, 2011

Filed Under (Environmental Policy, U.S. Fiscal Policy)

Gas prices are back in the news, simply because gas prices are rising.  Reporters like to discuss WHY gas prices are rising, but who knows?  The price of gasoline or crude oil can vary with any change, either in supply or demand.  We can always point to shifts in demand (like the growing economies of China and India), and we can always point to shifts in supply (like the shutdown of production due to unrest in countries of the Middle East and North Africa).  But it’s very difficult to sort out the net impact of each such factor, since the price is affected daily by so many different changes.

Instead of trying to answer that question here and now, let’s take a step back and look at whether any of the current changes are really that unusual.  Is the price of gas really high by historical standards?  And how much of that gas price is driven by energy policy, taxes, and factors under the control of policymakers?  In other words, let’s just look at the facts for now, and then try to analyze them later!

Here are the facts, for the fifty years since 1960.  The first figure below is from the U.S. Energy Information Administration (EIA).  Look first at the BLUE line, where we see what you already know:  the nominal price of gasoline has risen from $0.31/gallon to what’s now $3.56/gallon.  It’s driving us broke, right?

Well, not so fast.  The RED line corrects for inflation, showing all years’ prices in 2011 dollars.  So both series stand at $3.56/gallon in 2011, but the red line shows that the “real” (inflation-corrected) price of gasoline back in 1960 was $2.33/gallon.  In fact, compare the red line from 1960 to 2009: over those fifty years, the real price of gasoline only changed from $2.33 to $2.42 per gallon – virtually no change in the real price at all! 

From 2009 to 2011 the real price increased beyond $2.42, rising to $3.56/gallon, but that may be temporary.  You can see that the red line bounces around for the whole fifty year period.   In 1980, the real price was $3.35/gallon, so the current price is not much different from previous upward blips in the real price of gas.

Now look at the U.S. Federal Gasoline Tax Rate, in the next figure.  The red line in the next figure shows that the nominal statutory tax rate was four cents per gallon for years, and then it was increased in various increments to 18 cents per gallon today.  But of course, inflation has changed the real value of that tax rate as well.  Using 2011 dollars again, both real and nominal tax rates are 18 cents per gallon today.  But in 2011 dollars, the 4 cents per gallon back in 1960 was really equivalent to 29 cents today.  In other words, the real gas tax in the green line has fallen from 29 cents per gallon fifty years ago to only 18 cents today.

The gas price may be rising, but not due to any increase in the Federal gas tax.  That Federal gas tax is falling in real terms.  In the next entry, we’ll take a look at the various State gas tax rates, and we’ll look at how many of those taxes are fixed per gallon – so that they fall in real terms as inflation reduces the real value of those State tax rates.

One Response to “Gas prices are back in the news”

  • Edward Nowak says:

    How long until we see the connection between the explosion of the money supply and higher prices for oil and gas?