US gasoline prices are relatively moderate compared to historical levels
By: Alex Domash and Lawrence H. Summers
Over the last week, there has been heightened concern in the US over the rising price of gasoline associated with Russia’s war in Ukraine. On Tuesday, March 8, after President Biden announced a ban on Russian energy imports, the average cost of a gallon of regular across the country surged to $4.25, according to AAA. A barrel of US crude oil was temporarily trading at $130 per barrel.
But relative to historical levels, the average cost of a gallon of gasoline remains somewhat moderate. To put the price into perspective, we present in this note 1) the inflation-adjusted real cost of a gallon of gasoline and 2) the real cost of driving a mile, to recognize improvements in fuel economy (the average mpg for all 2021 car models was 31.3 compared to an average of 13.5 mpg for 1970 car models and 23.3 mpg for 1990 models).
Figure 1 shows the inflation-adjusted real cost of a gallon of gasoline from January 1976 to March 2022, using data on the average monthly price of regular gasoline available from the Bureau of Labor Statistics (for March 2022, we use weekly data available from the Energy Information Administration for the week of March 7). The nominal average price of gasoline is deflated using February 2022 CPI data. We also show estimates for the price of gasoline associated with future increases in the price per barrel of US crude oil.
Adjusting the price of gasoline for inflation reveals that the real cost of a gallon remains lower than it was 10 years ago, and relatively unexceptional compared to historical levels. Moreover, the quick rate of increase over the past weeks is also not historically unprecedented, and is comparable to changes in the average price of gasoline experienced during the mid 2000s.
To predict the price of gasoline that would correspond to further increases in the price of a barrel of US crude oil, we follow Hamilton (2009) who estimates that the relationship between crude oil prices and US gasoline prices follows a linear relationship with an intercept of 0.84 and a coefficient of 0.025 (approximately a $1 increase in gas prices for a $42 increase in price of a barrel). Given this relationship, we estimate that the price per barrel of crude oil that corresponds to the average U.S. gas price from Monday, March 7 ($4.10) is $130 per barrel. If the price per barrel increases to $150, we estimate the price of gasoline will increase to $4.59, and if the price per barrel increases to $200, we estimate the price of gasoline will increase to roughly $5.84.
Figure 2 below shows the inflation-adjusted average gas price per mile, factoring in improvements in fuel economy.
When accounting for improvements in fuel efficiency since the 1970s, the inflation-adjusted price of gasoline per mile in March 2022 looks relatively modest. Even if the price of crude oil per barrel increases to $150 or $200, the average cost of gasoline per mile would still be below previous record levels. The rate of the price increase is also not unprecedented: from 2003 to 2007, the real cost of gasoline per mile increased by over 15 cents per mile.
Overall, these figures suggest that the implications of the rising price of gasoline are unlikely to be extremely consequential, and that a lot of the panic over current gasoline prices are exaggerated when put in historical perspective. Furthermore, when accounting for the fact that family incomes have risen over the past decades, the current gasoline price becomes even less exceptional. Justin Wolfers shows that a gallon of gas costs an average of 9.3 minutes of labor today, compared to 13.5 minutes in 2008.
So, counter to what some have been suggesting: no, real US gasoline prices are not close to an all-time high today.
References
Hamilton, James D. “Understanding crude oil prices.” The energy journal 30.2 (2009).
IHS Markit Co., Average Age of Light Cars and Trucks in U.S, (Annual release), available at https://news.ihsmarkit.com/news-releases.
Michael T. Owyang and E Katarina Vermann, Rockets and Feathers: Why Don’t Gasoline Prices Always Move in Sync with Oil Prices?, Federal Reserve Bank of St. Louis. October 01, 2014.
US Energy Information Administration. Oil and petroleum products explained. July 26, 2021, available at https://www.eia.gov/energyexplained/oil-and-petroleum-products/
US Environmental Protection Agency. 2021 EPA Automotive Trends Report. Data available at www.epa.gov/automotive-trends/explore-automotive-trends-data.
