With summer upon as and gas prices reaching their usual summer heights, I find it interesting to hear people talk about how gas is at all time highs. If measured in absolute dollars then people are obviously right. The problem with that measurement is that by that criteria there are way more millionaires than ever before, and if you live in Canada (as opposed to the USA) just the rise in value of your house might be enough to push lots of people over the million dollar mark; however, this doesn’t necessarily mean those people are any better off, just like it doesn’t necessarily mean that gas prices are really at all time highs. This is obviously due to that weird economic term called inflation.
Inflation – The Personal Finance Bogeyman
Most people are aware that prices rise over time. They talk to their grandpa and hear the famous stories of buying a chocolate bar and a “soda pop” for a dime or quarter, but they don’t truly understand exactly why it that is. The truth is that inflation is a phenomenon that has puzzled economists for decades, if not centuries. To really confuse people we see terms like hyperinflation (when prices rise unbelievably quickly and currency loses any real value) and stagflation (just know this one means “really bad economy”). Most of the time prices will rise about 2-3% year after year. This is pretty normal, and most governments actually hope to just keep that rate nice and study. As long as wages increase at the same inflation rate as gas prices then everything is all fine and well right? This is where the understanding of inflation comes into play when viewing gas prices.
In order to compare the real wage price of gasoline in 2011 to the past I will use USA figures just because reliable sources for them are easier to find and the general point will remain the same. The average price of gas at the pumps in 2011 has been about $3.50 a gallon. The average price of a gallon of gasoline in 1981 was about $1.35; however, when we convert that into 2011 dollars and account for the inflation between 1981 and 2011, the average price of gasoline in 1981 was about $3.31. That revelation alone is kind of entertaining and it is useful to note that gasoline was not below $2.50 in inflation-adjusted dollars for most of the past several decades.
Sure Gas Prices Are Higher, but How Much Did They Used To Make “Back In The Day?”
Now it gets really interesting when you consider how much money people actually made at the time. While the most often quoted statistic about USA income goes by household, this can be misleading when it goes back very far because of the rise of the two-working-parents household. Even still, in 1981 the average household income when adjusted for inflation was around 43K, and in 2010 it was around 52K, this is a 21% difference in real dollars. Now if you really want to compare “apples to apples” I think the most comparable stat is probably in average male’s yearly wage, since that is the most similar wage position between 1960, 1981, and today. Obviously household income and women’s wages will be skewed due to the rise of the working woman. An average male in 1960 earned about $22,000 per year in inflation adjusted numbers (using 2004 numbers which was the most recent USA census bureau comparison I could find). In 2004 the average male wage was $30,500. That is a 47% jump! I realize it isn’t a perfect comparison due to 2004 numbers, but I think recent stats would show even more of a difference in 2007, and then a dip in 2008 obviously, and 2010 would probably be a few percentage points better than 2004.
Gas Prices – Comparing Barrels to Barrels
So, now that I have completely confused you with a bunch of numbers that don’t mean a whole lot individually, lets see if we can put them together to paint an accurate picture of gas prices over the years.
In 1960 the average price of gas was about $2.40 in today’s dollars. The average income for a male worker (the difference would be even more severe if we just did an average worker comparison due to the wage gap between male and female workers today) has risen 47%, and the price of gas would have risen 46%. So relative to the average male salary, gas is actually exactly where it was in 1960! If we look at 1981, the average male wage was $27,200 (again inflation adjusted), relative to the 2004 rate of $30,500 this is a 12% jump. Therefore, since 1981 gas prices have risen 6%, the average household income has been raised 20%, and the average male income has been raised 12%. By any measure here gas is still cheaper than in 1981.
Now I’m really going to get crazy. I couldn’t find any sort of “average spending of fuel costs when adjusted for inflation” numbers, so instead I just looked up the MPG average for passenger cars in the USA. It is absolutely hilarious to do some reading about fuel mileage in 1981 by the way. I read this one article in popular science that talked about how Lincoln had “responsibly” taken their 5.8L V8, and trimmed it down to a “sleek” 5.0L V8 in order to meet the new USA government standards. What were the USA standards during the Arab oil crisis you might ask? Well when they first came out in 1978, USA passenger cars were supposed to make an astounding 18 MPG. By 1981 that had been bumped to 22 MPG. I’m not sure what the average was, but I did see that a 1981 Toyota Corolla bragged that its 1.8L engine could make 25 MPG for certain stretches. If you think that they travelled less back then, it is true that we travel about 20% more now according to the US Department of Transportation, but the average amount of fuel purchased per passenger car in 1960 was 668 gallons, 760 in 1970, and 576 gallons in 1980, compared to 554 gallons in 2006, and I would be willing to bet that number would be closer to 530 gallons or so today.
Maybe It’s Not So Bad After all…
So to sum up all of the crazy numbers I’m throwing at you, yes gas is definitely more expensive than 20 years ago (I purposefully didn’t include stats from 1990-2000 just because I wanted to prove my point), but they are actually nowhere near record costs. In 1960 and 1981 they travelled less than we did, but their low-mileage cars meant they burned more fuel. Their gasoline appears to have cost much less, but when inflation is brought it into the picture we pay only a little more today than we used to. When we incorporate household income we start to look pretty funny saying that gas prices are much higher than it used to be, and if we take out the effect of women entering the workforce and just look at average male wages, we look downright ridiculous. The REAL cost, or effect on the family budget reveals that even with all-time highs in prices at the pumps, we are still better off with our higher wages, two-income earners, and fuel efficient vehicles than we were in 1960 or in 1981!