Arnold Kling     Essays | Short Book Reviews | Favorite Links | Under the Radar | Home

Arithmetic in a Whine

Arguing in My Spare Time, No. 4.18

by Arnold Kling

May 27, 2001

Everybody's desperately tryin' to make ends meet
Work all day, still can't pay, the price of gasoline and meat
Alas, their lives are incomplete

--Warren Zevon, "Mohammed's Radio"

In 1970, a few years before the Arab oil embargo and subsequent energy shortage (and about five years before Zevon's song appeared), the price of gasoline was 36 cents a gallon. On a scale where 1982-1984 = 100, the Consumer Price Index was 38.8. In other words, gasoline prices in pennies were about identical to the Consumer Price Index.

In April of this year, the Consumer Price Index stood at 176.8, which once again means that the price of gasoline in pennies is about the same as the Consumer Price Index. Adjusting for overall inflation, gasoline does not cost much more today than it did in 1970.

Gasoline is a smaller share of the consumer budget today than it was in 1970. Moreover, real incomes are higher today than they were in 1970. Therefore, changes in gasoline prices have a relatively small impact on the typical consumer.

If you drive 10,000 miles per year in a car that gets 20 miles per gallon, you buy 500 gallons of gasoline per year. In 1970, this would have cost $180, and today this would cost $900.

However, in 1970, per capita income in the United States was $3600. Today, per capita income is over $25,000. 500 gallons of gasoline would have used up 5 percent of the average person's income in 1970, but it uses up only 3.6 percent of an average person's income today.

Moreover, you can get a lot farther on 500 gallons of gasoline now than you could in 1970. Today, you have the option of driving a car with much higher fuel efficiency than the cars that were available in 1970.

Most people that I talk to are outraged by the price of gasoline. They think that a "reasonable" price for gasoline is about $1.20 per gallon, or 60 cents less than what it costs today. If gas prices fell by 60 cents, then 500 gallons a year would cost $300 less than at today's prices.

Many of these complainers are lawyers, who can earn $300 by billing an additional three or four hours for work. They are probably sacrificing more income by getting agitated and composing tirades against the oil companies than they are losing to higher gasoline prices.

There are some people who genuinely feel pain from higher gasoline prices. Taxi drivers typically are not permitted to raise their rates enough to cover higher costs. Many middle-income consumers enjoy recreational activities that depend on internal combustion engines. I have considerable sympathy for the cabbies, somewhat less for the water-skiers.

On the whole, though, the only rational economic perspective on the increase in gasoline prices over the past year is to treat it as a minimal-to-non event. If this is what passes for a crisis, then people really are desperate for an excuse to whine.