If I hadn’t been an economist, I might have been a songwriter. I don’t have much talent, but who knows?
When listening to some of the music now available on the airwaves, many of us have probably thought to ourselves, “I can do better than that.” Because of my great interest in baseball, maybe I ought to consider a composition with a theme relating to America’s favorite pastime, but then again, “Peanuts and Crackerjack” has already been done.
So, since Plan A has been taken, I guess I might consider taking up Plan B. And a possible subject for that tune could be high energy prices which are something that millions of Americans might be saying are always on their minds. With the cost of gasoline increasing faster than we can pump it into our vehicles, a lot of folks are singing the blues.
My contribution to the music industry should not be confused with the “Always On My Mind” made popular by Elvis during his latter days or Willie Nelson in his 1990 release. In fact, to avoid any similarity, I might entitle my forthcoming hit, “Always In Perspective.” A title like that ought to really have the iPods popping.
It may be hard to believe, but when inflation is added to the mix (keeping the buying power of the dollar constant), the high prices at the pump today are less than Americans spent in 1918. If that’s so long ago that only your grandparents could remember, then consider the fact that the same thing is true for the early 1980s.
When the percentage of increase in the price of gasoline is compared with the hike in other consumer items from 1982-84 (a common base period for the consumer price index) to today, gasoline actually has one of the lowest rates of gain—66.8%. Over those two decades or so, the cost of food has gone up about 88.7%, and housing has risen some 93.0%.
Consumer items that have increased by more than 100% include personal care services, 102.9%; motor vehicle maintenance and repair, 103.5%; rent of primary residence, 114.8%; and fruits and vegetables, 134.2%. Many others have jumped at an even greater pace, i.e., medical care, 218.7%; educational books and supplies, 257.0%; and smoking products, 396.1%.
The cost of gasoline rises almost every spring (21 out of the past 22 years). Still, 2006 is one of the worst in recent years. Over the past couple of weeks, the average US retail price at the pump has surged about 9%. The primary reasons for this year’s hike, of course, relate to the higher cost for crude oil, the continuing growth in demand, even more uncertainty and unrest in oil producing regions than before, and the requirements for ethanol blending as an additive.
Initially, the higher prices did not seem to have much impact on American motorists’ driving patterns. The constant soaring, however, has caused many to cut back on their gasoline use and has even motivated growing numbers to begin considering car pooling or public transportation. Though recent increases in the use of public transit systems cannot be directly linked with the shock and awe drivers are receiving at the pump, cost is undoubtedly playing some role.
Last week, the rail system in Washington, DC experienced two of the busiest days in its history. Riders who completed surveys admitted that the price of fuel is one of the determinants in their use of public transportation. Concern over the availability of gasoline may also be having an impact as several cities have experienced temporary shutdowns of stations that ran out of product.
This is Economics 101 at work: the higher gasoline prices rise, the more people will look for ways to use less of it. As they use less, overall amount demanded will fall, the amount produced will rise, and price relief will follow. As these patterns persist, the speculators who drive prices up are likely to calm down a bit. This is a far better outcome than some artificial price control measure which would do little more than cause shortages. (Remember those lines at the pump and even-and-odd-day rationing?) Other proposals to distort the market include a “windfall” profits tax on oil, which would only reduce incentives to find solutions and end up costing us more.
The US is not alone with the high costs. Gasoline is going up around the world. In many industrialized nations, consumers pay a lot more than we do to fill their gasoline tanks. Currently, a gallon costs about $6.73 in The Netherlands. Of that amount, $4.12 is tax. By comparison, the tax on fuel in America (about 15%) is the lowest of any industrialized country. Federal and state taxes on gasoline in Texas run about 38.4 cents per gallon.
Estimates indicate that US drivers will likely pay about 11% more for gasoline this summer as compared to the same period in 2005. By the time the weather gets hotter and the summer driving season hits its peak in late August, prices may drop slightly. Still, the costs will probably remain elevated.
Knowing that high gasoline prices will be with us for some time is certainly not welcome. However, realizing the increase experienced over the years is less from a percentage standpoint than gains in many other vital products may at least help us keep what we face at the pump in perspective.