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The Affordability of Gas:

Nominal prices of gasoline are at post-WWII highs. Even in real terms, gasoline prices are high -- higher than the peaks of the early 1980s. Yet gasoline is actually more affordable than ever, according to Indur Goklany. In this post on The Commons Blog, Goklany notes that:

Relative to 1978, the price of regular gasoline has increased by 260 percent in nominal terms and 47 percent in real terms. However the price-to-income ratio has declined by 17 percent, i.e., it is more affordable today.

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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:
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Energy Policy Follies

Congress seems intent on doing something to address current gasoline prices. Last time around all they could muster was a pork-laden energy bill that did nothing meaningful to address consumer concerns about energy costs and price volatility. Alas, Congress does not seem to have learned its lesson, and is pursuing a new set of policies that will do little good, and may cause harm -- or so I argue in this NRO column.

If Congress really cares about high gasoline prices -- even if the gasoline is more affordable than in decades past -- they should consider the role of current federal policies in reducing supply, balkanizing markets, enhancing price volatility, and discouraging alternative fuel sources. Yet if Congress won't even reduce tariffs on ethanol imports -- which would significantly reduce the costs associated with current ethanol mandates -- I see little hope for more meaningful policy reforms.

On a related note, here is a new study on SSRN quantifying the effect of reformulated gasoline requirements on wholesale gasoline prices and price volatility. The abstract is below:

The 1990 Clean Air Act Amendments stipulated gasoline content requirements for metropolitan areas with air pollution levels above predetermined federal thresholds. The legislation led to exogenous changes in the type of gasoline required for sale across U.S. metropolitan areas. This paper uses a panel of detailed wholesale gasoline price data to estimate the effect of gasoline content regulation on wholesale prices and price volatility. In addition, we investigate the extent to which the estimated price effects are driven by changes in the number of suppliers versus geographic segmentation resulting from regulation. We find that prices in regulated metropolitan areas increase significantly, relative to a control group, by an average of 3.6 cents per gallon. The price effect, however, varies by ten cents per gallon across regulated markets and the heterogeneity across markets is correlated with the degree of geographic isolation generated by the discontinuous regulatory requirements.

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