The “real,” wage adjusted price of gas isn’t at privation levels yet
– by New Deal democrat
Back in the “before” days, as in January, before the Iran war, I wrote about how low gas prices were actually a tailwind for the economy. Because since the start of the Millennium over 25 years ago, they had only been so low compared with average hourly wages on only 3 occasions: after the 2001 recession, late in the Great Recession, and during the COVID lockdowns. Put another way, it only took about 7 minutes of work to buy a gallon of gas. This leaves a lot left over for other consumption – just as it did at the end of the two non-COVID recessions.
Needless to say, that has changed. But by how much, really? On the one hand, as I’ve pointed out previously, on a percentage basis this is the biggest one-month spike in gas prices since the 1970s. We’ll find out just how badly that effected the CPI for March this coming Friday.
But how much of the “tailwind” has been taken away? That’s what the updated graph below, of the “real” cost of gas compared with average hourly nonsupervisory wages, shows:
The “size” of the spike is about equal to the 2005 Katrina spike, and less that the 2022 Ukraine invasion spike. But in relative terms, it has not come anywhere close to the 2008 spike that helped exacerbate the Great Recession, nor the Ukraine invasion spike. Nor, for that matter, what I used to call the “Oil Choke Collar” of the early 2010’s, when gas prices put a lid on the velocity of any expansion in the early years of the last recovery. In order to approach the level of those shocks, we would need to see gas prices of $5/gallon, at minimum.
The gas price information doesn’t go all the way back to the 1970’s, but the price of oil, specifically West Texas Crude, does. So here is the same graph, of oil prices relative to average hourly nonsupervisory wages, going all the way back to before the first oil shock:
Here you can see that just before the start of the Iran war, the “real” price of oil was equivalent to the levels it was at from 1986-99, when gas prices were not a consumer issue at all. The current spike has not taken us back up to the levels of either the first Gulf War spike of 1990 nor the second oil shock of 1979-80.
The bottom line here is that, although this price spike is enough to marginally change consumer behavior, it isn’t yet at the point where in the past it has created a sense of real privation (in 1974 the spike was accompanied by an embargo that resulted in gas rationing). That isn’t to say it couldn’t get there in another month or two. Although I won’t bother with a graph, according to GasBuddy the national average has risen as much as another $0.12 in April up to $4.11. To reiterate, my sense is that a real sense of privation isn’t likely to kick in unless gas prices reach $5/gallon.
“What is the effect of Oil and Gasoline Prices on the US economy?” Angry Bear by New Deal democrat
One big difference with the ’73 and ’79 gas price jumps was that back then, gasoline was not always available at the pump. Even if the price didn’t matter, you couldn’t just drive to a gas station and buy some. There was also panic buying, like toilet paper early in COVID. When word got out that gasoline was available, lines would form with drivers topping up their tanks even if they were far from empty since they didn’t know when they’d be able to top up again. I’ve seen prices go up, but I haven’t seen gas stations out of gas since then.
Kaleberg:
Very true on all points. As I said in one post. It was difficult to fill up in Chicago due to the lines. Once I got down near Lewis University, there were no lines at the Thorton’s station. Fill up my Datson 510 there and bring 5 gallons home for the International Harvester tractor to cut the acres of grass.
While it may be true that the real price of gasoline is historically not all that high. That’s the perspective of academic economists. And the fact is that it’s true.
But that’s not what matters. First, most Americans can’t remember what a lying politician said last week, so I doubt they can remember how bad gas prices were ten years ago, much less 50 years ago. Second, the recent years of inflation, higher price levels, and the resulting affordability crisis have been seared into Americans’ memory. Gas prices are highly visible, easily remembered, and a indicator of inflation to come. They are a highly sensitive issue when you’re living paycheck to paycheck. Given the issue of affordability, posting higher gas prices is tantamount to opening a sore wound.
I remember how Gore lost in 2000 after the great economy of the 1990s, which he had tried to claim some credit for. One of his problems was rising gas prices…
Faux News yappers claim high gas prices are “emotional” …
Ten Bears:
I get a little angry when I pay more for gasoline for my efficient VW Passat.
John:
You make a good point.
However, we brought this on ourselves by not voting, voting for others and electing a lunatic for president. ~Three million people did not vote in 2024 compared to 2020. There was increased voting for others. Does Trump really re[resent what people want?
The avg family will spend ~$700 to ~$800 more this year due to increasing gasoline pricing resulting from the attack on Iraq. Everyone jumps in to take advantage of increasing profits. I wonder if Trump gets a kickback.
A lot of large pickup trucks out there that never carry anything but one or two people.
@Bill,
“A lot of large pickup trucks out there that never carry anything but one or two people.”
And SUVs. And Humvees. And a lot of those drivers live out in the exurbs with long commutes.
On my daily walks, I still see plenty of cars idling while parked. 0 mpg.