Policy Issues Just How Costly Is Gas? Summer 26 Introduction. Across the nation, the price at the pump has reached record highs. From unleaded to premium grade, prices have broken three dollars per gallon in many markets for the first time. While record high gasoline prices are indisputable, it can be argued the gas is not as expensive as first thought. Adjusted for inflation, gas prices were higher in the early eighties than they are now. Moreover, gas commanded a greater proportion of consumer budgets in eighties than now. History. During the second half of the seventies, unleaded gasoline sold for approximately 6 cents per gallon. By 198, one-dollar-per-gallon-prices had arrived. For approximately twenty years unleaded gasoline prices fluctuated between $1 and $1.5. The nadir for the nineties occurred in 1999. After 22, the price has been trending upward once more. Cents Per Gallon Figure 1 Unleaded Gasoline Prices 35 3 25 2 15 1 5 1976 1981 1986 1991 1996 21 26 Source: ; Energy Information Administration. Last data point: March 26. Adjusting gasoline prices for the effects of inflation (in economic terms, converting nominal dollars to real dollars) reveals a trend distinct from that above. Figure 2 below shows that inflation-adjusted prices have fallen significantly from their levels in the early eighties, and have been stable in the nineties. The
inflation-adjusted price indicates that gasoline is about the same price as it was twenty years ago when the nominal price for gas was above $1.23 per gallon. 35 Figure 2 National Retail Motor Gasoline Prices 1978-25 Cents Per Gallon 3 25 Real (25 = 1) Price 2 15 1 5 Nominal Price 1978 1981 1984 1987 199 1993 1996 1999 22 25 Note: Real prices in chained 25 dollars. Source: ; U.S. Department of Energy. Prices increases of gasoline have not kept pace with price increases of other consumer goods. Table 1 shows the growth of consumer prices for selected items. Since 198, the consumer price index (CPI) has risen 137%. In other words, the price of a basket of consumer goods is 137% higher now than in 198. Not all items in the basket grow at the same rate. Medical care grew 332% in the same period, while apparel prices grew just 31%. Gasoline prices increased only slightly at 4% growth during the eighties, while the prices of other consumer goods continued to climb. Even during the low-inflation nineties, the prices of all other items, medical care, and housing, grew at a faster clip than gasoline. It is noteworthy that gasoline prices have risen more rapidly than other consumer goods since 2. If unleaded fuel prices grew at the same pace as the CPI (less energy) since 198, unleaded prices would be $3.6 per gallon. The most recently published city average price for unleaded is $2.45 (March 26, Department of Energy). This implies that the average cost of unleaded is 2% below where it would be had gasoline prices kept pace with the prices of other goods.
Table 1 Changes in the U.S. Consumer Price Index for Selected Items All items All items less Gasoline (all New energy Medical care Housing types) vehicles Apparel 198-25 137% 143% 332% 141% 1% 56% 31% 198-199 59% 64% 117% 58% 4% 37% 39% 199-2 32% 33% 6% 32% 27% 18% 4% 2-25 13% 11% 24% 15% 51% -3% -8% Source: ; Bureau of Labor Statistics. Driving more, but using less fuel to do it. Improved fuel efficiency is enabling automobile users to travel further on less fuel. As Figure 3 below illustrates, the fuel economy (miles per gallon) has risen 43% since 1973. Simultaneously, miles per vehicle (mileage) rose by only 21% and fuel consumption (gallons per vehicle) fell 16%. These factors combine to produce the result that we are driving more miles, but with the change in fuel efficiency, we are using less fuel. Figure 3 National Motor Vehicle Mileage, Fuel Consumption, and Fuel Rates All Motor Vehicles, 1949-23, Index 1973=1 16 14 12 1 8 6 4 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 21 Mileage Fuel Consumption Miles Per Gallon Note: Mileage is miles per vehicle. Fuel consumption is gallons per vehicle. All vehicles includes passenger cars, motorcycles, vans, pickup trucks, sport utility vehicles, trucks, and buses. Source:
More spent on dining out, and entertainment, than gas. Figure 4 below illustrates annual consumer expenditures on select items. In 1985, gasoline and oil accounted for 4.4% of total expenditures for the average consumer. A greater percentage of expenditures was dedicated to entertainment, dining out, and health care. Between 1985 and 24, gasoline and oil expenditures accounted for a declining share of total expenditures. The lowest year was 22, where gas accounted for less than 3% on consumer expenditures. In 24, gasoline and oil account for less than 4% of total expenditures still lower than the 1985 figure, but higher than 199-22. There are two factors at play here. Either the price of consumer items is changing or the quantity consumed is. The reality is probably a combination of the two. Health care costs more, and we are consuming more of it, therefore it is commanding a larger share of our expenditures now versus 1985. Inflation-adjusted gasoline prices are still lower than they were in the late seventies, which can partially explain why gas accounts for a small share of our expenditures now versus 1985. Figure 4 U.S. Average Annual Consumer Expenditures on Select Items 1985-24 Percent of Total Expenditures 25 2 15 1 5 1985 199 1995 2 22 24 Gasoline and oil 4.4 3.6 3 3.3 2.9 3.7 Health care 4.7 5.2 5.2 5.3 5.7 5.9 Dinning out 6 6.3 5.4 5.7 5.6 5.6 Alcohol 1.3 1.1.9 1.1 1 1.1 Entertainment 5 5 5 4.9 5.1 5.1 Source: and BLS The average consumer spends $1,598 on gasoline and oil per year. Though this figure varies across age cohorts, expenditures are relatively stable for many adults aged between 25 and 74. At age 75 and over, fuel expenditures fall below the $1, per year mark. The average consumer expenditures on gasoline and oil rose 53% between 1985 and 24. Simultaneously, entertainment expenditures rose 14%, alcohol expenditures declined 17%, dining out rose 112%, and health care rose 129%. Therefore, gasoline expenditures have not kept pace with other consumer items through a combination of more fuel-efficient automobiles and moderating gasoline prices.
Figure5 U.S. Average Annual Consumer Expenditures on Select Items 1985-24 Total Expenditures ($) 12 1 8 6 4 2 1985 199 1995 2 22 24 Gasoline and oil 146 154 114 1316 1252 1598 Health care 1122 1497 1747 212 241 2574 Dinning out 1449 1843 184 228 2395 376 Alcoholic beverages 313 39 32 423 415 259 Entertainment 1193 1451 1687 1958 2167 2434 Source: and BLS Gasoline expenditures as a share of total expenditures are quite stable across income classes. For all income groups up to $5, - $69,999, gasoline and oil account for approximately 4% of expenditures (Figure 6). The income class of $7, and above spends the lowest share on gasoline: 3%. This implies that higher income equates to higher fuel purchases. This can be the case where there is a base level of automobile usage that is necessary irrespective of income. But as incomes rise, discretionary use of automobiles increases as families travel for vacations and other non-necessity purposes. 5 Figure 6 U.S. Share of Average Annual Consumer Expenditures on Gasoline and Oil by Income (in thousands) 24 Share of Total Expenditures 4 3 2 1 All incomes Less than $5 $5 - $9.9 $1 - $14.9 $14 - $19.9 $2 - $29.9 $3 - $39.9 $4 - $49.9 $5 - $69.9 $7 & over Source: and BLS.
While the share of total expenditures dedicated to gasoline is stable across income classes, the dollar amount does vary. Lower income households spend fewer dollars on gasoline. Households earning less than $9,999 spend approximately $62 per year on gasoline and oil. Households earning $2, to $29,999 spend approximately $1,19 per year. Households earning $3, to $49,999 spend approximately $1,5. 25 Figure 7 U.S. Average Annual Consumer Expenditures on Gasoline and Oil by Income 24 Total Expenditures ($) 2 15 1 5 All incomes Less than $5 $5 - $9.9 $1 - $14.9 $14 - $19.9 $2 - $29.9 $3 - $39.9 $4 - $49.9 $5 - $69.9 $7 & over Source: and BLS Over the past year, the average price of gas in Delaware has been slightly lower than the national average with the exception of the month in September when gas prices spiked as a result of Hurricane Katrina. For the months of April and May, the average price of gas Delaware has been about the same as the national average. Figure 8
Table 2 shows the growth of consumer prices for selected items in the Philadelphia area (which includes New Castle County). Since 198, the consumer price index (CPI) has risen 144%, which is slightly higher then the national rate of growth at 137%. The rate of growth of consumer prices in the Philadelphia metropolitan area is slightly higher then the national average across all categories. This is consistent with the higher cost of living of the mid-atlantic region. Table 2 Changes in the Philadelphia area Consumer Price Index for Selected Items All items All items less energy Medical care Housing Gasoline (all types) 1 New vehicles 2 Apparel 198-25 144.26% 151.62% 396.68% 149.34% 12.51% 19.72% 1.6% 198-199 62.44% 68.35% 122.2% 66.11% 7.12% 48.22% 7.42% 199-2 29.97% 31.17% 66.49% 27.54% 23.5% 226.22% 1.18% 2-25 15.69% 13.95% 34.37% 17.69% 53.7% 12.1% 1.27% Source: ; Bureau of Labor Statistics. Delawareans spend more money on dining out, and entertainment, than gas. Figure 9 below illustrates annual consumer expenditures on select items for the Philadelphia area. In 1986, gasoline and oil accounted for 3.2% of total expenditures for the average consumer. A greater percentage of expenditures was dedicated to entertainment, dining out, and health care. Between 1986 and 2, the percentage of expenditures that Delawareans spent on gasoline declined. As of 23, Delawareans spent 4.8% of their expenditures on gasoline, increasing from 2.4% in 2. This is a sharp increase and marks the highest proportion on record of consumer expenditures dedicated to gas. Figure 9 Average Annual Consumer Expenditures on Select Items for the Philadelphia area 1986-23 (share of expenditures %) 25% 2% 15% 1% 5% % 1986 199 1995 2 23 Gasoline and oil 3.17% 2.71% 2.5% 2.35% 4.82% Health care 3.95% 5.18% 4.57% 4.48% 4.78% Dinning out 7.1% 6.1% 4.99% 5.91% 5.78% Alcohol 1.5% 1.6%.94%.91% 1.37% Entertainment 4.44% 4.57% 4.32% 4.2% 4.1% Source: and BLS 1 The CPI for Motor Fuel was used to calculate the values for Gasoline (All Types). 2 The CPI for Private Transportation was used to calculate the values for New Vehicles.
Figure 1 illustrates the total annual expenditures for the Philadelphia area of select items. Delawareans spent $2,143 on gasoline and oil in 23, which is a 13.2% increase since 2. Figure 1 Average Annual Consumer Expenditures for the Philadelphia Area on Select Items 1985-24 (total expenditures $) 1 8 6 4 2 1986 199 1995 2 23 Gasoline and oil 83 863 793 931 2143 Health care 999 1648 1451 1779 2126 Dinning out 1773 1941 1586 2346 2572 Alcohol 379 338 3 36 68 Entertainment 1123 1452 1371 1667 1822 Source: and BLS Caveat. Averages are a powerful means to understand the general expenditure patterns of U.S. consumers. The drawback is that consumers whose expenditures deviate significantly from the average are concealed. For some consumers, rising gasoline prices will impose a real financial hardship. Nevertheless, the facts presented here suggest that for a representative consumer, the rising gasoline prices will be financially manageable. Summary. Record gasoline prices are generating outrage from drivers, and will continue to be a policy issue. Nevertheless the evidence suggests that gasoline expenditures are, on average, a relatively small budget item. Historically, consumers spent more of their budgets on gas in the eighties than presently. Within the context of other consumer expenditures, consumers spend approximately fifty percent more of their budgets on dining out, and thirty-eight percent more on entertainment, than on gasoline and oil. However, as gas prices continue rise, gas expenditures may command an increasing share of total expenditures, and reduce discretionary expenditures on other items. Should the price of oil continue to rise, inflation-adjusted prices will close in on the record high of 198.