Believe It Or Not, Gas Prices Are Cheaper Than They Used To Be

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“Gas prices are low but I remember when the price of a gallon was under a dollar!” Is this a misconception?  How much did that gallon of gas really cost when the price was under a dollar?

How Cheap Is Gasoline Really Today?

With the dramatic decrease in the price of oil in 2015, exactly how cheap is gasoline today? That depends on who you ask. A small amount of time spent in research would bring up article after article where economists describe and debate the nuances of this price decrease and whether they believe repercussions will have a positive or negative effect on the US and global economy. These inquiries are bona fide but the question I ask is how does this price effect the consumer? Is it really creating less stress on our budgets? The goal of this analysis is to measure the effect of the price of gasoline on US consumer’s wallets throughout the years.

graph of retail price per gallon of gasoline from 1945 to 2016

This chart shows the price of gas has been volatile throughout the years but overall the price has increased. Although 2016 hasn’t come to a close, the price is based on an overall annual estimate for the year of $2.06.1

graph of the median houshold income in the United States from 1945 to 2016

This chart depicts the median household income in the United States in current dollars. Median household income in the US has gradually increased since 1945. The figures for 2015 and 2016 have not yet been published, for the sake of this analysis median household income for these two years is projected using regression. In order to directly compare US median income to the retail price per gallon of gas, we can create a ratio using these two variables to estimate the percentage of a US citizen’s income that has been spent on gasoline. This ratio is created by taking the price per gallon of gasoline in any given year and dividing it by US median income in that same year – a gas-to-income ratio. The ratio captures the relationship between these two variables enabling us to compare results year-to-year.

comparison graph of retail price per gallon of gas to United States median income from 1945 to 2016

The blue line compares retail price per gallon of gasoline to US median income. The price per gallon, the dotted gray line, is included for context.  The percentage to the right is an estimate of the share of an American’s annual income spent to purchase 500 gallons of gasoline a year. For a 16 gallon-tank car, 500 gallons a year represents to filling up the tank slightly more than twice a month. The yellow line is the gas-to-income ratio estimate for 2016. This means, with respect to the yellow line, any time the blue line is above this estimate, gas was more expensive from a consumer perspective and vice versa when the blue line is below the yellow line.

Taking into account this ratio and analyzing this chart, we can measure how Americans have been affected by both the ebbs and flows of their income and the price of gasoline. This analysis indicates that the 27 cents Americans paid at the gas pump in 1950 hit their wallets harder than it did when the price was over three dollars in 2012. This is because, on average, a gallon of gas was a larger percentage of household income in 1950 than it was in 2012. The ratio hit its highest point in 1949 when gas was $0.27 a gallon and average income was $3,000. The gas-to-income ratio hit its lowest point in 1996 when a gallon of gasoline costed $1.06 and average income was $38,885.

We can see from the yellow line on the graph, if gasoline remains in the two dollars a gallon range for the remainder of 2016, consumers could be experiencing some of the least expensive gasoline prices in the past 70 years! These prices would be comparable to $1.88 a gallon in 2004, $0.86 in 1987, and $0.31 in 1966. The only times the gas-to-income ratio was below its current level was in the 1990s and a short time in the 1970s – pre-Iranian Oil Crisis.

It’s easy to assume that gas prices are more expensive now than they used to be when only looking at one figure – the price. Calculating that figure as a percentage of income provides a new lens through which to view historical gas prices. Today’s low prices present an opportunity to savers and investors.

More Money?

Have you recently been experiencing more money in your pocket due to less money spent at the gas pump? Spending less on a full tank of gas opens up many opportunities in one’s personal budget; pay down your debts, save more for retirement, put more money towards a vacation. Whatever the opportunity may be for you – take advantage of it, the price of gas could very well be at historic lows from a consumer perspective.

 

End Notes

  1. View full short-term energy outlook at http://www.eia.gov/forecasts/steo/.