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Gasoline Affordability Revisited:

Last week, relying on data posted by Indur Goklany on The Commons Blog, I claimed that gasoline is "more affordable than ever," despite the increase in real and nominal gas prices. Some commenters objected that this generalization is misleading due to a rise in income disparities. The price-to-income ratio for the average American may have dropped, largely because the rich got richer, without equivalent affordability gains for the poor.

Glen Whitman at Agoraphilia investigates this claim by examining the price-to-income ratio by quintile from 1973 to the present, and finds that even for the poorest fifth, gasoline is cheaper than it was at its peak.

So what can we see? Even looking at the poorest fifth of the population, the fraction of income required to buy gasoline is still lower than it was in the early '80s. Not surprisingly, the fraction has risen a great deal over the last few years, but it still has not surpassed its historical peak. The same holds true for every other income quintile, but the effect is more muted, since higher income means any given price difference will correspond to a smaller fraction of income. (If gas prices stay at their current price of about $2.90/gallon, however, then we could pass that early-80s high-water mark this year.)

Related Posts (on one page):

  1. Energy Policy Follies
  2. Gasoline Affordability Revisited:
  3. The Affordability of Gas:
John Armstrong (mail):
So it's more affordable (adjusted for inflation) than it was at its peak in the '70s. There's still a long way to go from that fact to "than ever".
5.16.2006 10:54am
go vols (mail):
Does anyone doubt that gas prices will average about $2.90 for the rest of the year (perhaps rising even higher for the summer months and decreasing in the fall)?

If so, doesn't that mean the evidence Adler cites is as likely to hurt his claim of "affordable than ever" as help it?
5.16.2006 11:13am
You Know Who:
John,

An important element that is missing from the argument is that poor people have a much harder time quickly adjusting their behavior to *rapid* spikes in an essential commodity and an even harder time when the plateau of the spike is *maintained* over time (and never returns to baseline).

Gas prices in the 70’s, if you recall, did spike but eventually fell – that’s probably not going to happen here, because the pressures that have led to higher prices, principally higher demand for oil in China and India and the developing world, are not ephemeral.

I suspect (though I’m not certain) that the most recent *change* in gas prices over the last year or so was one of the largest in history and, unlike previous spikes, probably will be maintained for some time (viz., gas isn’t falling under $2.00 anytime soon).

It sucks to be poor. But the current rapid rise in gas prices, which shows no sign of abating anytime soon, will be particular costly to the poor.
5.16.2006 11:15am
You Know Who:
Mr. Armstrong,

My comment was addressed to the author of the post -- not to you. It sounds like we're on the same page.
5.16.2006 11:20am
W. J. J. Hoge:
It's still roughly one-tenth the price of Starbuck's coffee.
5.16.2006 11:53am
amn (mail):
Why do conservatives feel the need to be gas-price apologists? My guess is that if there was a 50% gas tax applied a year ago that raised prices from $2.00 to $3.00 there would be no end to the crying from the right. And with the tax they would actually be getting something out of the $1.00 /gallon that went to their government instead of Saudi Arabia's.
5.16.2006 12:01pm
You Know Who:


Oh, how I wish I could fill-up with Hill Country Fare Breakfast Blend.

Unfortunately, the price of gas ($2.70 ± 5 in San Antonio) is less elastic than the price of coffee.
5.16.2006 12:08pm
Tom952 (mail):
(If gas prices stay at their current price of about $2.90/gallon, however, then we could pass that early-80s high-water mark this year.)

What price is Glen using to draw his conclusion?
5.16.2006 12:12pm
You Know Who:
Good Question: http://www.gasbuddy.com/
5.16.2006 12:15pm
You Know Who:
One prominent conservative (Posner) has called for higher taxes on gas.

But he ends his plea on a pessimistic note:


Unfortunately, a population ignorant of economics and suspicious of the Administration's motives probably cannot be brought to understand the social benefits of high gasoline prices and heavy gasoline taxes.


http://www.becker-posner- blog.com/archives/2006/04/the_gasoline_pr.html
5.16.2006 12:22pm
Daniel Chapman (mail):
Well your link doesn't work, but I think I remember that post... Wasn't his argument something along the lines of discouraging high consumption rates?

A high gas tax might be beneficial in a big city where traffic congestion is a concern and there are alternative means of transportation... but it would hurt terribly in rural areas. Perhaps high municipal taxes on gasoline would work.
5.16.2006 1:13pm
Silicon Valley Jim:
My guess is that if there was a 50% gas tax applied a year ago that raised prices from $2.00 to $3.00 there would be no end to the crying from the right.

Not from me, there wouldn't. I waited in a line for gasoline for the first time on President's Day 1974, when I was in law school. In the best tradition of American self-reliance, I bought a bicycle the next day; a bicycle has remained an important means of transportation for me for more than thirty-two years.


poor people have a much harder time quickly adjusting their behavior to *rapid* spikes in an essential commodity and an even harder time when the plateau of the spike is *maintained* over time (and never returns to baseline).

Can you provide us with a link to support that assertion? It may well be right, but I do like to see supporting evidence.
5.16.2006 1:18pm
SLS 1L:
So today's gas prices aren't the highest they've ever been. That's not remotely the same thing as "more affordable than ever."

Sometime in the late '90's (or was it the early '00's, before 9/11?) gas prices dropped below $1.00/gallon in many areas. Nominal prices have more than tripled since then.

I look forward to your proof that today's $3.30/gallon gas is more affordable than the $0.90/gallon gas we had not so many years ago.
5.16.2006 1:32pm
Tom952 (mail):
A gas tax to curb consumption is sloppy. It penalizes all drivers, even those driving 30mpg sedans.

Why not be more specific and tax vehicles that consume excessive fuel?
5.16.2006 1:44pm
Rational Actor (mail):
If I am not mistaken, tax policy a couple of years ago actually encouraged people to purchase fuel-inefficient vehicles like Hummers and Range Rovers by allowing for accelerated tax depreciation....
5.16.2006 1:51pm
A. Zarkov (mail):
If people are driving more (or consuming more gas per mile) then I think the rise in gas prices is more of an economic burden today than in 1981 despite the increase in personal income. I suspect they are. Commuting from exurbs to job is now common. In many cases I see them commuting alone in an SUV. A lot of people commute (alone) from the California Central Valley to the Silicon Valley area. That’s a big trip requiring almost two hours each way. In the northern Virginia area people commute (alone) from places like Gainesville to Washington DC-- a trip at least 1.5 hours each way. When I worked in Fairfax almost everyone in the office had a long commute. None of them used car pools. Many would come in as early as 6:00 am to avoid the congestion. The rise in gas prices is a significant burden for them because they think the have no other alternative. I wonder what would happen if gas were $7.00 per gallon as it is in Europe?
5.16.2006 1:54pm
Brian Greenberg (mail) (www):
amn:
Why do conservatives feel the need to be gas-price apologists? My guess is that if there was a 50% gas tax applied a year ago that raised prices from $2.00 to $3.00 there would be no end to the crying from the right. And with the tax they would actually be getting something out of the $1.00 /gallon that went to their government instead of Saudi Arabia's.

And why are liberals convinced that the money they pay at the pump goes to Saudi Arabia? Saudi Arabia (and all the other oil producing countries) sell their oil at the market price (that's the price/barrel you hear so much about on TV these days).

The only way to reduce the revenue the Saudis (and others) get is to reduce the demand for their oil - either by finding another source (e.g., ANWR), or by reducing consumption. And that's not just driving either - heating our homes, producing our electricity, making various other petroleum based products (like plastics) all consume oil.
5.16.2006 2:08pm
Rational Actor (mail):
A. Zarkov wrote:

The rise in gas prices is a significant burden for them because they think the have no other alternative.

Operative words: "they think"
I am sure that some of these people who have moved to the burbs have no attractive alternative, but there is always an alternative. Think of the cost synergies to carpooling - in addition to lower fuel costs, people can save by going to one subscription to Sirius, reduce their cell phone utilization by talking to their co-commuter (knock-on benefit of reduced future healthcare costs to treat the inevitable behind-the-ear-tumor), shared recipes....
Part of the problem is that there was a reasonably rapid price increase. I suspect, over time, that people will find a way to mitigate the impact by changing their behavior. It just takes some time, and some lifestyle changes. And while I have no link to offer Silicon Valley Jim, no one who has been poor, or spent much time working with the poor, needs an academic or statistical analysis to support You Know Who's assertion. It really hurts to skip that grande extra hot soy milk decaf no foam latte.
5.16.2006 2:08pm
Mark Buehner (mail):

My guess is that if there was a 50% gas tax applied a year ago that raised prices from $2.00 to $3.00 there would be no end to the crying from the right.


Perhaps because a gallon of gas would by now cost $6.00 with the extra tax. The problem with gas taxes is that they are so incredibly lucritive neither party in that pork feeding frenzy we call congress is about to turn off the spigot. Hence we get the crazy pandering offer for the hundred dollar rebate checks when simply cutting the gas tax would be far simpler. Gas taxes may get suspended, but they never get cut.

A great Republican talking point the next time a Democrat brings up the windfall profits oil companies are making is to ask how much the federal government has raked in in gas taxes in the last year compared to any oil company on earth. The federal gas tax is quite a bit bigger than any oil companys' margins- if anyone is gouging its Washington.
5.16.2006 2:09pm
Meryl Yourish (www):
If you are among the working poor, and you have budgeted $20 a week for gas, when the price goes to $30 a week, you have to take that $10 a week from somewhere else.

It doesn't matter how affordable gas is compared to the 1970s. What matters is that poor people are taking that ten dollars a week away from other parts of their budgets that are deemed less urgent than filling the tank so Dad or Mom can drive to work.

How, then, does knowing gas was cheaper thirty years ago affect this problem today, other than for those who can actually afford to take the extra hit?
5.16.2006 2:14pm
Jimmy (mail):
Tom952,

Define excessive.

That 30 MPG sedan looks pretty good compared to a 15 MPG SUV... unless the sedan routinely transports only one person and the SUV transports three. For every 30 people miles travelled, the sedan burns one gallon while the SUV only burns 2/3rds of a gallon.

Seems excessive.
5.16.2006 2:26pm
Marcus1 (mail) (www):
>So it's more affordable (adjusted for inflation) than it was at its peak in the '70s. There's still a long way to go from that fact to "than ever".<

Indeed, and this isn't just speculation. The graph shows that the percentage of income paid today is in fact significantly greater than at any time other than that one peak. That seems a pretty strong refutation of the original argument.

That point about price volatility disproportionately affecting poor people is a good insight too.

Of course, it's not like there's any great significance to this statistic, particularly since the liberals like me want to raise the price further with taxes anyway(though I'd like to see the revenues from those taxes disproportionately benefit the poor).

I'm kind of curious, though, what Prof. Adler or the other conservatives think of this increasing gap between the rich and poor. Is this a good thing? Is it giving poor people a greater incentive to work? Has that been effective? I find it hard to believe that moderate conservatives don't see any problem with this ever-growing disparity. When large numbers of people start inheriting more money than many others stand any chance of ever making, is this no problem at all? Is this all fine as long as the purchasing power of the poor is marginally increasing over time?

The fact that conservatives like to minimize the growth of the disparity tells me that they must be at least a little uncomfortable with it.
5.16.2006 2:28pm
M. Python:
To boost the ... economy I'd tax all foreigners living abroad.
5.16.2006 2:33pm
Truth Seeker:
It sucks to be poor.

But at least you don't have to waste your youth finishing high school or working nights and then getting up early in the morning to take college classes. And you can use your pay for cars and gas and cigarettes and tatoos and partying instead of blowing it on tuition and staying home every night for book learning.
5.16.2006 2:33pm
Rational Actor (mail):
Mark Buehner:

A great Republican talking point the next time a Democrat brings up the windfall profits oil companies are making is to ask how much the federal government has raked in in gas taxes in the last year compared to any oil company on earth. The federal gas tax is quite a bit bigger than any oil companys' margins- if anyone is gouging its Washington.

Better double check the facts before talking this one up. I suggest going to source documents rather than reports that have been carefully prepared, and even more carefully worded, by groups seeking to reduce the taxes paid by oil companies.
5.16.2006 2:34pm
abb3w:
amn:
Why do conservatives feel the need to be gas-price apologists?
Most obviously, because the Reaganite conservatives were the ones who crushed Carter's push towards alternative energy when Reagan came in. If we had been researching the problem for the last 25 years, we wouldn't be in this exact fix. (Mind you, I think we would still be in a fix, but we'd be much better positioned.)

But wait, there's more! Travelling via mass transit is a substitute for going by personal car, although an inferior one, but generally more fuel efficient and thus less affected by energy price increases. My impression is that mass transit has been a central government service that the political right (wearing their "fiscal conservative" hats) haven't been enthusiastic about maintaining and improving, and certainly won't be real happy about having to expand.

Given that automobile gasoline probably behaves as a luxury good for submedian incomes (especially compared to public transport), I'd be mildly interested in comparing the gas prices relative to quintile disposable income... albeit not enough to sneak off and find the numbers while at work. I suppose it would be interesting to throw in fuel economy numbers as well (to find income relative cost per mile over time), but trying to find average vehicle fuel economy by income quintile would be more trouble than it's worth.

As I read the graph, gas is higher than it's ever been barring the 1979-84 peak for the bottom 3 quintiles. As others have noted, not exactly "cheaper than ever". "Not as bad as it's been before" seems far more accurate. And, cynic and peak oil kook that I am, and noting that the flattening of the climb at the end of the curve may be due to the excessively conservative calculation for the current year, "looking like it's going to get worse" seems more accurate.
5.16.2006 2:37pm
Marcus1 (mail) (www):
Tom,

>A gas tax to curb consumption is sloppy. It penalizes all drivers, even those driving 30mpg sedans.

Why not be more specific and tax vehicles that consume excessive fuel?<

I think that's sloppier. Maybe I have a specific need for a giant SUV, but I only use it on rare occassions. Why should I bear the entire tax? Alaskans, for instance, tend to drive big trucks, but they don't commute 50 miles every day like people down in the lower 48.

The gas tax works because it creates a greater incentive to get the fuel-efficient car, and with the added tax the person with the fuel-efficient car has an even greater advantage over his neighbor with the hummer. One can't forget the second part of the picture, which is that a gas tax means either increased government services or lower taxes in other areas (as much as conservatives would say it's just money down the tubes). So the real benefit to the guy with the fuel-efficient car is essentially that now the government is getting huge tax revenue from the people with the big cars, while he is only having to pay relatively little. If everybody then gets 2000 dollars chopped off their income taxes because of all these new revenues, while his gas tax is less than that amount, the benefit becomes obvious.
5.16.2006 2:41pm
Tom952 (mail):
Marcus1
a gas tax means either increased government services or lower taxes in other areas

Oh, how I wish it were so. We would all be luxuriating in valuable government benefits here in the land of unlimited government budgets.

You are actually weighing a persons "need" for large SUV against a persons "need" to drive lot of miles every day. We have all seen too many 3 ton SUV's on a 7-11 run by a single passenger to buy into the SUV "need" argument. In a nation dependant on unfriendly petroleum producers, big SUV's are an irrational indulgence.
5.16.2006 3:39pm
A. Zarkov (mail):
Rational Actor:

Yes I chose my words carefully. I once commuted about 40 miles (each way) for more than 20 years, which included 1981. I had a fuel-efficient compact and a car pool. Put 2 to 4 people in a compact car and the cost of commuting becomes trivial even at $3.00 per gallon. Our car pool lasted 20 years (with the same people). It ended when I moved closer to work (4 miles) and one person retired. But it seems lots of people don’t want to do what I did. One on- again-off-again member of the pool was an environmentalist energy modeler who would come up with all manner of ways to force the public to conserve. I use to tease him. “It’s that’s true why don’t you use the car pool more.” “I can’t I have too much to do.” So there you have it in a nutshell, Americans just don’t want to do that. So let them pay the freight. Meanwhile I don’t notice the traffic decreasing with gas prices going up. Just more whining.
5.16.2006 4:20pm
Jimmy (mail):
Back to the Saudi Arabia oil vs ANWR oil - we aren't having problems getting oil out of our own country, it's the REFINING that is the problem. My Royal Dutch Shell &Alliance clients explained that the high cost is us buying already-refined gasoline from the outside nations, instead of buying crude that we refine here in the US. Increasing refinery capacity is one of the few answers to reduce Middle Eastern participation. They are rich b/c they have excellent refineries that handle huge volume. Our US companies are not interested in increasing refineries.

At any rate, we need to move beyond refined gasoline as the sole fuel we use, because it is difficult to create vs a diesel solution. All hail the cooking oil car!

To fix the economics of one-person SUV driving, try a tiered tax on the bigger cars and car-pool incentives. Of course, you;ll need a big lobby to change those laws. Not even war in the middle east, coupled with natural disasters that harm refinery capacity, coupled with human &non-human created global warming can stand against the almighty K Street.

Better public transportation would help, but it is a large cost and maintenance to keep up, and in MANY areas makes zero sense. Boston can barely keep the buses running, let alone extend their transit systems to serve more than a 9-to-5er lawyer with big bucks. It is not positioned to assist the blue-collar or low income worker.

There is no easy way to decrease the oil consumption, as others have stated, increasing your standard of living has many hidden costs, and almost all include more oil being used for something. Could be the white asparagus shipped from CA to MA in my Stop &Shop. COuld be the disposable diapers I buy instead of laundering the cloth ones. Could be the vacation I take down in the Cape, driving my car and renting a boat for the day. Or leaving my computer on all day long to share files and play games.

So many little things that have an impact - the best way is to improve the tech that creates energy in our lives and find ways to be rid of non-renewable consumption as much as can be done.
5.16.2006 4:44pm
Josh_Jasper (mail):
Well, it's not like energy companies would actually create an artificial energy crisis in order to drive up prices.

No, wait, YES THEY WOULD
5.16.2006 5:02pm
Public_Defender (mail):

It sucks to be poor

But at least you don't have to waste your youth finishing high school or working nights and then getting up early in the morning to take college classes. And you can use your pay for cars and gas and cigarettes and tatoos and partying instead of blowing it on tuition and staying home every night for book learning.


Staying home book learning every night? Some kids don't have that luxury. They have pay their own way through multiple jobs.

Yes, there are lazy poor people, but there are also many who work multiple jobs to try to get through college, and who are only one serious illness away from losing everything.

As your post demonstrated, there are also a lot of snotty middle class and rich kids who don't know what it's like to worry about not having enough money to put food on the table or go to the doctor.
5.16.2006 5:46pm
Tom952 (mail):
There is no easy way to decrease the oil consumption,

Jimmy - Isn't there great potential for reduction by raising our overall personal vehicle efficiency?
5.16.2006 6:50pm
Kevin L. Connors (mail) (www):
John, you should consider submitting this to Mark Tapscott's Carnival of Cars.

Who Know Who,

Gas prices in the 70’s, if you recall, did spike but eventually fell – that’s probably not going to happen here, because the pressures that have led to higher prices, principally higher demand for oil in China and India and the developing world, are not ephemeral.

That's not so sure. Petroleum reserves are at all time highs . What is lacking is extraction, transportation, and refining capacity. Many industry analysts see that as catching up with demand on a 5-10 year time frame.
5.16.2006 7:18pm
Splunge (mail):
...there are also many [poor] who work multiple jobs to try to get through college

Then they won't be poor for long, will they?

This is somewhat off-topic, perhaps, but a point frequently overlooked in debates over "the poor" is that most of them are only temporarily poor, so it's more accurate to talk about people experiencing poverty than "poor people," as if the latter are some kind of different, pathetic animal.

For example, I lived in a "poor family" when I was 10, and wore nothing but hand-me-downs, walked or biked everywhere, and qualified for free school lunches. But that was because my father went back to medical school and earned nothing for four years. Obviously our situation improved quite a bit after he graduated. I was also a "poor person" for five years when I was in graduate school, scrounging by on mac and cheese and qualifying in California for "lifeline" reduced phone rates. Of course, after I got my PhD, my situation improved dramatically. Finally, a friend of mine was recently one of those sad "poor single mothers" who lived in a dicy part of town and qualified for the EIC and MediCal. Why? Because she suffered from parental neglect as a child, or was unable to hold down a job through discrimination, drug abuse, et cetera? Nope. Because she quit work for two years to get a nursing degree. With her spanking-new RN, she now earns $51,000 a year.

This Heritage Foundation report points to Census Bureau data that suggest if we define the chronic poor -- on whom everyone seems to focus -- as people who are in poverty for more than four years, they are only about 2% of "the poor" at any given time. The same data suggest 50% of "poor" people experience poverty for less than four months -- typically as the gap between being unexpectedly fired and finding a new job -- and 80% of "poor" people experience poverty for less than a year.

It's important to be aware of the facts to have a rational discussion of what's to be done, even about the impact of gas prices on "the poor." If you think being "poor" is usually a chronic state (which is false), then you might (mistakenly) think the answer is big long-term education projects in the, er, projects, or food stamps to help single mothers feed newborns for five or more years, or subsidized daycare and transportation. But if you realize being "poor" is most often a momentary dislocation caused by being involuntarily between jobs, you might realize temporary strings-free cash assistance (because sometimes it's more important to pay for unexpectedly pricy gas than to buy extra food), bridge health insurance to cover gaps in employment, job-finding assistance, relocation assistance, and so forth might make a lot more sense.

You'd also have to realize that some kinds of assistance don't make sense, because they'd lengthen and not shorten the time between self-sufficient periods. Being poor is supposed to suck, because that's the main motivation for working. It's one thing to offer a helping hand in a crisis, quite another to start enabling dysfunctional behaviour.
5.16.2006 7:20pm
Marcus1 (mail) (www):

a gas tax means either increased government services or lower taxes in other areas

Oh, how I wish it were so. We would all be luxuriating in valuable government benefits here in the land of unlimited government budgets.


Well, if you view all taxes as 100% wasted money serving absolutely no purpose other than to punish, then I guess I disagree with you on that. If you'll concede, however, that tax revenue does actually provide us with something, and that it has to be gotten one way or another, then I think a person should necessarily be happy when things are taxed that he uses disproportionately little.
5.16.2006 8:11pm
David M. Nieporent (www):
A gas tax to curb consumption is sloppy. It penalizes all drivers, even those driving 30mpg sedans.
It "penalizes" them in direct proportion to how much gas they consume. Seems like the most direct way to curb consumption.

Seems far more "sloppy" to tax vehicles based on fuel efficiency if the issue is fuel consumption.
Why not be more specific and tax vehicles that consume excessive fuel?
If someone "excessively" drives a 30mpg sedan, why should that person not be "penalized" in the same way as someone who drives a 15 mpg SUV half as much?

The reason the tax is better is because it allows individuals, rather than the government, to decide how much is "excessive." The reason the tax is better is because it provides incentives to reduce consumption, while the "SUV tax" you propose merely provides an incentive not to buy SUVs.
5.16.2006 9:21pm
Tom952 (mail):
Not to buy SUV's?

Well, it would provide an incentive to buy a more efficient vehicle, SUV or otherwise.

Switching to a more efficient vehicle is fairly easy, so drivers may be more easily persuaded to do so. Changing jobs or relocating your residence is more complicated. A low or middle income worker driving a fuel miserly vehicle may not have any options in the short or medium term, and it would be unproductive and burdensome to artificially increase their fuel cost.
5.17.2006 12:34am
Kevin L. Connors (mail) (www):
Marcus1:

Well, if you view all taxes as 100% wasted money serving absolutely no purpose other than to punish, then I guess I disagree with you on that. If you'll concede, however, that tax revenue does actually provide us with something, and that it has to be gotten one way or another, then I think a person should necessarily be happy when things are taxed that he uses disproportionately little.

It's not that money spent by the public sector buys nothing, but that, in most cases, it creates very little real wealth, in relation to the same amount spent in the public sector - where the rules of the marketplace apply.

Car guy that I am, I would have no objection to higher gas taxes, if the money was actually spent on increasing highway capacity for everyone. Instead, much of it is wasted on car pool lanes, totally impractical fixed rail systems, bike paths, or sundry demonstration projects, having little or nothing to due with transportation at all.
5.17.2006 1:00pm