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Gasoline Is CheapFour dollars a gallon is outrageous! We should be paying much more.

By Robert BrycePosted Thursday, May 15, 2008, at 3:24 PM ET

The next time you have to take out a loan just to fill up your tank, remember this: Four-dollar-per-gallon gasoline is cheap.

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There's no doubt that high fuel prices are hurting low-income consumers, and high energy costs are placing a tax on the economy that is slowing investment while sending billions of dollars overseas. It's unsurprising that presidential candidates and members of Congress issue new proposals practically every day to lower gas prices: Stop filling the Strategic Petroleum Reserve! Suspend the federal gas tax! Open ANWR to oil drilling!

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These proposals are delusions, and Americans are living in a fantasy land when it comes to energy and energy prices. Over the past few years, consumers have been inundated with news stories about the soaring price of gasoline. Invariably, these stories include comments from a motorist who is outraged at the evils of a) Saudi Arabia, b) OPEC, c) Big Oil, d) all of the above.

But by almost any measure, gasoline is still cheap. In fact, it has probably been far too cheap for far too long. The recent price increases are only beginning to reflect its real value.

When measured on an inflation-adjusted basis, the current price of gasoline is only slightly higher than it was in 1922. According to the Energy Information Administration, in 1922, gasoline cost the current-day equivalent of $3.11. Today, according to the EIA, gasoline is selling for about $3.77 per gallon, only about 20 percent more than 86 years ago.

Given the ever-increasing global demand for oil products—during the first quarter of this year, China's oil consumption jumped by 16.5 percent—and the increasing costs associated with finding, producing, and refining crude oil, it makes sense that today's motorists are paying more for their motor fuel than their grandparents and great-grandparents did.

Gasoline is also a fairly minor expense when you consider the overall cost of car ownership. In 1975, gasoline made up 33.4 percent of the total cost of owning and operating a car. By 2006, according to the Bureau of Transportation Statistics, gasoline costs had declined to just 17.1 percent of the total cost of car ownership. Of course, fuel costs have risen by about $1 per gallon since 2006, but even with those increases, fuel continues to be a relatively small part of the cost of car ownership. By contrast, the fixed costs of ownership—insurance, licensing, taxes, and financing—have increased nearly fivefold since 1975. Maintenance costs have also quintupled over the same time period. Given those increases and the relatively low price of fuel, it's not surprising that Americans are opting for big vehicles with powerful engines. Considering the overall cost of owning a vehicle, fuel expenses just aren't a very big deal.

History shows that significant declines in U.S. oil consumption occur only after prolonged periods of high prices. Over the last two decades, U.S. consumers have been spoiled by low fuel prices. And those lower prices led to a buying binge that put millions of giant SUVs, pickups, and other gas guzzlers on our roads. Today's higher prices are forcing consumers to adapt. The EIA now expects U.S. gasoline consumption to decline this year—the first drop in demand in 17 years. In April, sales of small cars in the United States were up by 17 percent over the same period a year earlier while sales of SUVs, trucks, and large cars all fell by about 30 percent.

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On the environmental front, people concerned about greenhouse-gas emissions should be cheering today's oil prices. Expensive motor fuel is the only thing that will lead consumers to use less oil and make the switch to hybrid vehicles, smaller cars, and public transit. Higher oil prices are convincing automakers to change their fleets. Earlier this week, Nissan Motor Company announced that it will begin selling an electric car in the United States and Japan by 2010. Carlos Ghosn, the chief executive of Nissan, made it clear that fuel prices were a factor in the company's decision to build electric cars, telling the New York Times that "the shifts coming from the markets are more powerful than what regulators are doing."

American gasoline is also dirt-cheap compared with gas in other countries. British motorists are currently paying about $8.38 per gallon for gasoline. In Norway, a major oil exporter, drivers are paying $8.73. In 2007, out of the 32 industrialized countries surveyed by the International Energy Agency, only one (Mexico) had cheaper gasoline than the United States. Last year, drivers in Turkey were paying three times as much for their gasoline as Americans were. The IEA data also show that in India—where the per capita gross domestic product is about $2,700 (about 6 percent of the per capita GDP in the United States)—drivers have been paying more for their diesel fuel and gasoline than their American counterparts.

(Gasoline is also cheap compared with other essential fuels. A Starbucks venti latte costs the equivalent of $23 per gallon, while Budweiser beer runs $11 per gallon.)

The simple truth is that Americans are going to have to get used to more expensive gasoline. And while they may continue grumbling at the pump, they need to accept the fact that even at $3.50 or $4 per gallon, the fuel they are buying is still a bargain.

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Robert Bryce is the managing editor of Energy Tribune. His latest book is Gusher of Lies: The Dangerous Delusions of "Energy Independence."

Illustration by Rob Donnelly.

COMMENTS

Notes from the Fray Editor

The first comment—from a German visitor to the US--produced a great, good-humored discussion on Europe/US differences: highly recommended. See also the same poster's "The Five Stages of Grief and gasoline prices in America."

Comments from the Fray

I think the main problem is that the whole American public infrastructure in the last six decades has been built with the assumption of cheap gasoline. That's why the population density within most American cities is very low when compared to Europe, and the suburbs sprawl out forever. That's why there are few bicycle lines (and often not even sidewalks) along the streets, and the local public transportation system is often rudimentary and only covers a small part of the cities (and Amtrak is a joke - I was really surprised that Columbus didn't have a passenger rail station despite (a) having a fairly large population and (b) an active rail line going through the city). Everything assumes that everybody is able to get anywhere with a car - and now that alternatives start making a lot more sense, such alternatives are hard to get by.

--Jurgen Hubert

(To reply, click here)

There is about a 4:1 ratio between the fuel consumption of the worst and best of what people consider passenger vehicles. That says that there are some people who could change what they are driving in such a way as to spend as much in their new vehicle with $16/gallon fuel as they now spend on $4/gallon fuel. If there were no side effects, then I would be content to let the stubborn continue on their profligate path. However, anybody who is using more fuel (be it gasoline, diesel, or alcohol) affects the rest of us by driving up air pollution (as in smog), global warming, and the price of fuel for the rest of us. I think that gives us the right to control the behavior of others in this area.

--PhilfromCalifornia

(To reply, click here)

How utterly contemptuous of the working poor who have no choice but to drive from suburb to suburb or exurb to suburb everyday to support their families. The current price of gas is killing people like this. The snobby elitist scorn of the gentrified urban post-modern yuppies at people who have to drive is precisely why the white working class will vote for McCain in November. It may feel good to watch the Hummer driving exurbanites feel the pain, but there are plenty of working people (many of whom can't afford a new car and therefore have to drive a gas guzzler) who just don't have the same freedom of choice the liberal urban elite have to choose not to drive. Ironic that the urban elite enjoy the privilege of being able to choose to walk or take mass transit because they live in former ghettos that have been gentrified for their benefit and the former ghetto residents who have had to move to the far suburbs and exurbs to find affordable housing are now getting screwed at the pump.

--Links

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