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Oil Price Impact on Consumers Overestimated
In the 1980’s it took almost 14% of disposable income to fuel one’s car for 15,000 miles per year. Now it takes about 7%. Granted that is up from 3% a few years ago, but it still is not enough to be anywhere near what American’s endured in the ’80’s. The following very insightful analysis by Mark J. Perry with important help from Warren Meyer is well worth one’s time to read and then ponder.
Yesterday’s CD post of a graph of 1,000 gallons of gas as a percent of per-capita disposable income (top graph above) shows that we’re still nowhere near record highs for gasoline, when measured as a share of income.
Warren Meyer at Coyote Blog thoughtfully suggested adjusting the analysis to account for the significant increases in fuel efficiency over time, see middle chart above, which shows the 64% increase in fuel efficiency from the early 1980s to 2005.
The bottom graph above shows the results of Warren’s analysis (see his chart here), which calculates the percent of per-capita disposable income required to buy enough gasoline to drive 15,000 miles, at the average fuel efficiency in each month from 1980 to 2008. This adjustment for increased fuel efficiency makes the initial results even more dramatic.
After adjusting for: a) higher incomes and b) greater fuel efficiency since 1980, we are nowhere near record highs for gas. In fact, to match the 13.75% level in 1980 when average fuel efficiency was only 16 mpg (and gas was $1.26 per gallong and per-capita disposable income was $8,575), gasoline today would have to reach $7.53 per gallon, almost twice today’s prices!
Bottom Line: Gas prices today are almost 50% below the record highs of 1980, after adjusting for higher incomes today and much greater fuel efficiency
Tags: peak oil energy investments
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29 responses so far ↓
1 paultaut // Jul 11, 2008 at 8:29 pm
Most of this years vacation plans are set in stone. Canceling vacation schedules, prepaid air tickets, Hotel resevations, camp ground permits, etc. will not be an option for most. Don’t accept miracles from the Public.
Next year will be an entirely different story. Demand Destruction will rear its ugly little head somewhat.
Having said that, lets look at the charts listed above. Everything is statistically true. I can say this with ease since I worked in the Statistical/Actuarial department of an Insurer for over a decade. (many blue moons ago).
The big problem, as I see it, is not the cost of Gasoline to the public but rather the Cost of Diesel which includes Heating Oil and Jet Fuel.
If any of you know where I could find stats similar to those above but relating to diesel only, Please steer me thither.
2 KV // Jul 11, 2008 at 8:38 pm
Numbers can be made to tell lies, and this story does that extremely well. Unfortunately, many blowhards (especially Fox News guys) will use it to mislead.
1980 was the year when we began building fuel efficient cars (see the middle chart), and we really got into the gear by the start of 1990s. Further, when one accounts for deflated oil prices through 2000, the cost computation is obviously supports distorted and unsupported claims.
Until 1990s, we owned two cars at maximum, one commuter car, and one family car. Now, it is not uncommon to see up to four cars per family, and most all cars are driven hard as we have spread out to suburbs 50 or 60 miles away. It is not easy to keep cars below 1,500 miles per month. When you factor increased number of cars and mileage driven, the disposable income spent on the cars per family would substantially increase that the claims made in the article. If we had not improved fuel efficiency, the cost would be way high.
The real story these charts are trying to tell is that today’s cost of owning a car has increased nearly 150% from what it cost in 2003, or in >15% per year, and rising fast.
By the way, the local pizza shop owner sold out because he could not make a living primarily because of the increased fuel cost for delivery.
3 paultaut // Jul 11, 2008 at 11:55 pm
Our local Pizzaria is triving, They have increased the cost of the Pizza’s and levied a surcharge of an extra $1 for the costs of delivery.
While this may seem harsh to you, my wife and I feel it is still worth having a non-cooking day for either of us.
Now, back to your rant. These people have presented their stats. you meanwhile are trying to poke holes in their findings without presenting anything other than what you believe.
I live in a suburb of Chicago. We own a 2002 toyota camry, the mileage just hit 25,000. One vehicle for the two of us.
We use Public Transportation to get to the city, Burlington. Thereafter, its bus time.
Feul efficiency? what a load of garbage, Sure there was a song and dance by the Big three for a while but in reality, they made good use of a loophole which allowed them to spread Feul Efficiency Across their entire product line by producing small cars which didn’t sell within a bunch of big inefficient cars which did. This made the stats look good on paper for them.
Earlier this Decade people were buying Hummers, Large SUV’s and Mini-vans, please tell me about Feul Efficiency again. The Hummer was no more efficient than a pre-embargo Caddy.
People made these choices for no other reason than their neighbors had one.
Besides, what we are talking about here is the cost of a Gallon then vs now as a percent of income. Doesn’t matter what sort of vehicle is driven, chart Nr. 1.
The major Caveat that should be considered but is not. IMHO, is the average income of the groups analyzed by Suburb VS City.
You must live in the Suburbs, to get there your income must have been higher than the average Joe still stuck in the city. So having moved into the Burbs, you felt you had a lifestyle to live up to. Tough.
4 the rook // Jul 12, 2008 at 12:42 am
a key problem with the article (and part of how it tries to obfuscate the problem) is that it confines its statistics to ‘passenger cars’.
of course consumers haven’t been buying and driving passenger cars. over the last 10 - 20 years, sport utility vehicles and trucks have been the most popular vehicles with the government paradoxically encouraging people to buy the biggest 3 ton trucks with tax incentives. since suvs get about half the milage of a passenger car, the cost of fuel to run them will come up to a considerably higher percentage of disposal income than the charts imply.
5 L Jakus // Jul 12, 2008 at 3:32 am
This is probably why gasoline use is down so little (about 3% according to the latest statistics) despite the huge increase in price. There needs to be demand destruction for gasoline in the USA to reflect the declining available of oil products, and the way that will happen is through increasing prices, either through more profits to the oil producers (governments or companies) or through taxes. So, it looks like clear sailing up to $7/gallon before any serious demand destruction will occur.
6 Robert Essian // Jul 12, 2008 at 4:10 am
Jim, coming from a large family of 13 brothers and sisters our parents message to us was “everything in moderation” and “food, clothing and shelter” are the only essentials to life.Love and Loyalty being the glue. Now when push comes to shove I’m quite certain that there is a whole lot of stuff in our lives that can be eliminated to afford the ever rising of gas prices. You’ll start to eat at home more, everyone in the family will pitch in and your neighbors names are remembered. The environement will become cleaner and family’s stronger. It will be a brighter tomorrow I will assure you of that. No pain, no gain. Keep everything simple, stupid(coaching mantra).
I read all the comments because I never want to be blind sided by anything. Sometimes, I get off message. I hate that because I see all of this to be as simple as Supply and Demand. When I read things like demand destruction and other comments I want to immediately remember that supply is at its peak and falling going forward so the destruction of demand will never be an important part of this equation in my view. On balance everything we consume is on the table for removal to satisfy our basic needs. In conclusion, I have to admit that I love every part of this Peak Oil saga, I do not fear it, in fact I embrace it. Everything in my life has come into focus because of this issue. Forgive me but it excites the heck out of me. Thanks Jim for making so much of this clearer to me.
7 KV // Jul 12, 2008 at 8:33 am
Paultaut, you are - what they call in statistics - an oulier.
Actually, Perry should use your usage rate and show there is nothing to worry about: drive 4,000 miles and be happy.
Rest of your note is fine as it supports what I said. Perry is distorting numbers, and I can’t believe, but Jim keeps falling for these unrealistic analysis.
8 KV // Jul 12, 2008 at 8:36 am
Robert Essian,
If all of us revert to our basic needs, the US economy will contract by a factor of ten if not more. There will be super-depression world over, and oil would be $1 a barrel, only if you could make a dollar.
9 paultaut // Jul 12, 2008 at 9:35 am
So, start the ball rolling. Revert.
Meanwhile, I don’t much to revert to other than using off brand products for my cooking needs. Can’t stop using Nat. Gas though, Everything is electric already.
Let’s say the Public gets back to the Basics, Recent Survey says “70% of the public will not change anything at the present time”.
But next year with Gas at $6, a different tune will be sung.
There won’t be a Super depression the world over simply because more than Half the world is living at what we call Depression Levels right now.
The Oil we save will provide them the opportunity to grow. About time, IMHO.
The High Horse USA, will have to retrench and start living within its Energy means on a Per Capita Basis.
10 KV // Jul 12, 2008 at 11:07 am
Paultaut,
Unless there is a clamity, man never reverts to oldways, like living by basic needs.
I am surprised that only 70% will not change. I thought the number would be much higher, especially when you see unending traffic jams even where the gas cost $10 per gallon, and everybody is aspiring to bigger and more powerful cars.
11 KV // Jul 12, 2008 at 2:24 pm
1980 was the year when the OPEC oil cartel had pumped up price to near $30. In early 70s, we paid $2~$4 for a barrel of oil. This is a price increase of nearly ~500+%. Gas went from less than 40 cent to $1.60+ or nearly 400%, and there were lines, and you can only fill up on odd or even days, provided the gas station did not run out. Some gas stations even limited the purchase.
It is pays to start a chart at the worst time in the history if you want to show things are not bad compared to today (Bush administration continually compares Iraq misadventure to WWII, conveniently forgetting that there is no enemy except stateless thugs, a job for special forces, not for an army).
The real comparison would be that for more than a decade (1985-2003) the cost of driving a car remained about 4.5%. Since in that time disposable income nearly tripled, the same 4.5% actually represented 3 times the numbers of dollars spent in 1985. Or, $500 in 1985 became $1,500 in 2003. And the oil price never really changed!! By the way, this is all after tax dollars.
From Perry’s chart, today we are paying 225% more that 2003. Or we are spending nearly $3,400 – or $65 per week per car to get about 16 gallons, to go about 320 miles, or five commuter round trips at 50 miles each, and 7 visit to local grocery store, or Starbuks.
Paultaut, I hope these numbers provide you facts to refute such nonsense.
Mark Perry is an accomplished at distorting statistics.
12 paultaut // Jul 12, 2008 at 6:26 pm
Finally, a nice clean response. I knew you had it in you KV.
There is are a couple of saying: “a picture is worth a thousand words” and “figures don”t lie, but liars figure”.
For the most part, I prefer to look at the pictures and draw my own conclusions. So it doesn’t bother me if someone draws a different conclusion.
But if you are going to comment, use the old KISS rule.
Nice talking to you, have a fruitful life.
13 Robert Essian // Jul 13, 2008 at 8:10 am
KV, respectfully, what have you cut back on to save some dimes to help pay your bills including oil? Now multiply that by the billions of people who are doing the same thing. I understand we will not all cut to the bone but the economy will demand some cuts be made…Where and what to be cut is the family’s personal choice. It will have a huge effect that my pay grade can’t put a number on. However, it is my opinion that the resources (cash) will just shift to what’s really important. A simple example would be a water purifier under your kitchen sink as opposed to bottled water. The cost to the environement, the oil used to make the plastic, etc…Would be a positive. The jobs lost in making the bottles would just shift to the plant making the purifiers. Another example might be ground chuck instead of a sirloin burger. The ground chuck has a higher fat count but that would be important when your hungry, the added calories would be great because you’re not eating as much because you’re cutting back. The sirloin burger would taste better but you’ll be hungrier sooner. The cost savings from the ground chuck could then be used to pay for gas.
In conclusion my point is we are not yet at the point to have to make these decision but make them we will.
14 Robert Essian // Jul 13, 2008 at 8:58 am
KV, I’m not done yet so hear me out. The politicians in this country will drag their feet and not heed what I consider a good start proposed by T.Boone Picken’s. At the very least he has a rational start to publicly bring this certain problem to the conscious minds of the American people to fix our problems.
The politicians because of their lack of movement on this issue will result in us having an oil szar or something resembling it. He or she will have the powers to move resources for infrastructure as they see fit. If you ever have researched the Marshall plan you get a heads up on what will be done in the near future. Now in 1942 casual driving was suspended for emergency’s only, you couldn’t buy a new car if you wanted too, pots and pans were donated to the cause of freedom except for a few favorites. Rationing was the norm and you got stamps representing how much food and what items you could purchase for that particular month. The list goes on and on. You will live within your means I can assure you of that. No frills, back to the the basics stuff and you’ll love it.
The World’s financial system didn’t evaporate and our economy and family’s survived
When this God aweful period ended the US became the role model for the world. We lost our way. As we find ourselves again we’ll find that our good works will in all likely hood save the planet. It will happen and soon.
What are the multiples of that! Does it matter…Really?
It’s a done deal my friend, signed, sealed and delivered. So stock up the freezer because back in the day of my parents and the last depression cow tounge was the meat of choice for many hungry family’s.
15 Tommy Atkins // Jul 13, 2008 at 11:28 am
Adding to the information left out of this story is that, according to FHWA, vehicle-miles driven have increased by about 94% since 1983. Using the author’s third chart showing that the cost of gasoline for a single average vehicle is down perhaps 30% (as a percent of income), when you factor increased miles driven, the total fuel cost is probably a higher percentage of income today than in 1983.
16 KV // Jul 13, 2008 at 3:08 pm
Robert Essian,
I do all that is listed below, not because I have to, but I think it is the right thing to do.
1. I drive a small but safe car and get 28.5 mpg in the city/suburb driving. I combine multiple tasks in one trip and have reduced my driving by 30% and I have about an extra hour everyday.
2. I use counter top filter for water, I buy bottled water in bulk to take to gym, and each and every bottle is recycled including the plastic wrapper on the bulk package. We carry our own bags so we are not laden with plastic bags.
3. I do not eat hamburgers, I eat mostly vegetarian food, and next year I will be growing half of the veggies I eat scattered in my flower garden.
4. I programmed my heat pump so that it sub-cools the house after midnight, I sleep well, and air rarely comes up during the day. Reverse in winter.
============
I do not know Pickens position, so I can not comment. However, politicians are going to do things that is expeditious, part of the problem is that no politician’s hide is ever in trouble. Until there is a crisis, nothing happens and that is stupid.
I do not subscribe to doom and gloom stuff, I do think we are going to have twenty difficult years, but we will adapt fast. We have the knowledge and ability to turn on a dime, but, first we have to be through the blame game, and finally we need new blood in our political and regulatory systems.
Oilmen have gotten rich at the expense of the rest of us. However, I look at the silver lining: we will change very fast, and do all the right stuff even with a few stumbles, we will maintain our way of life, which is not driving cars and trucks, but to live free and without fear, and in the process, we will not be dependent on imported oil nor will we be polluting air, water and land indiscriminately.
Twenty years for all this is the challenge.
17 Robert Essian // Jul 13, 2008 at 5:04 pm
Amen Brother…We are forever linked to the better way of living. Your friend
18 paultaut // Jul 13, 2008 at 9:13 pm
What is the first thing an Alcoholic must do rehabilitate?
Stop denying that he is an alcoholic.
I think that as a nation we haven’t even gotten close to that reality. Especially on the political level, they are still trying to blame everyone else.
19 Bob Sandler // Jul 14, 2008 at 10:15 am
In making his case, the author and his readership would have been better served had he been substantially more inclusive by aggregating all of the higher oil price impacts, such as home heating oil, electricity generation, and the higher cost of product and services whose delivery prices to the customer are influenced by higher and rising energy costs.
20 KV // Jul 14, 2008 at 1:54 pm
The article at the end states:
Gas prices today are almost 50% below the record highs of 1980, after adjusting for higher incomes today and much greater fuel efficiency
This applies to everything! Cars, corn grown from an acre, etc. The statement implies as if we owe and are obliged to pay higher price for oil! Conversely, it also implies that oil supply is more than adequate and recent price increases are contrived at best.
I only wish if Jim stops falling for this type of articles. He runs a great website, and is extremely informative, and he is also extremely bright, but needs much more skeptism in his assessments.
Perry distorts facts, but when lies are repeated over and over they become facts, only because most lack time or resources to dig through.
It is becoming jungle out there.
21 Robert Essian // Jul 14, 2008 at 5:09 pm
You guys are killing me…It’s supply and demand….That’s it. Save your bodies calories because you’re going to need them.
22 jkingsdale // Jul 14, 2008 at 5:27 pm
KV: you say, “The statement implies as if we owe and are obliged to pay higher price for oil! Conversely, it also implies that oil supply is more than adequate and recent price increases are contrived at best.”
I do not see either of those implications here. The only implication - statement of fact, really - is that the pain of high oil prices is not yet as great as it once was. This may say something to explain the degree of demand destruction we are seeing (fairly low). But it says nothing about future oil prices or supplies or the reason for today’s prices. Which, for what it’s worth, I agree are simply a matter of supply and demand.
23 Robert Essian // Jul 14, 2008 at 7:57 pm
I’ll turn out the lights now…Good night Jim-Bob
24 KV // Jul 14, 2008 at 9:18 pm
Jim,
Here is a stat to consider: inflation adjusted price of a bushel of corn in 1973-74 was over $14 in 2006 dollars. And, in 2006 the same bushel went for about $4 is 2006 dollars. Or corn was 350% higher in 1973-74.
In late 1970s, major car companies and major parts suppliers were planning for average car price of $100,000 in year 2000 (I worked at one of these companies and was part of strategic planning team). Today’s average price for the car is about $24,000, with bulk of the cars in $15K~$20K range.
There is something called productivity, efficiency, product improvements, etc. I know for the fact that refining efficiency for oil has significantly improved, so has transportation, and even the pumping gas in the car (recirculation of gas vapors). Same is true for oil extraction. Further, world has been producing oil from ~25 millions of barrels a day in 1980 to today’s ~85 millions of barrels per day. Peak oil has been predicted since 1960s (I remember a book titled Next 100 Years, but can’t find it in my stockpile that address these concerns).
Here is my take from lots of readings (and applying in my work) for a long time: we are not running out of oil, but we are running out of the oil/fossil fuel based cheaply commuting lifestyle including mega-mansions and mega-cars, and we are now adding up the perpetually neglected indirect cost of the fossil fuels on our health, our environment, and our politics, hence our ideals.
That is why alternate energy, conservation, better way of living and commuting are all necessary, and you, through your website, have continually advocated the same. I appreciate that. I also understand practical need for investing in oil at the same time.
Whether it is electric cars and batteries, or Back to the Future’s flux capacitors running on garbage, it does not matter, except that we must move toward this massively instead of drilling holes all over the world and perpetually living in fear of speculators, dictators, cartels and politicians. If we can spend a trillion dollars to catch two guys in turbans, and another trillion dollars (300 billions per Paulson today and counting) to bail us from sub-prime thieves (actually Savings and Loan all over again), I think we can add about 100 billion dollars a year to get us independence in energy.
Frankly, I actually welcome this increase in oil price caused by dollar devaluation as well as increased speculation through highly leveraged futures, because it is accelerating the change I would like to see in the paragraph above.
Other options are sustained inflation or super-recession, neither are good. Unfortunately, we will have taste of both in coming 20 years probably more than once.
25 KV // Jul 14, 2008 at 9:49 pm
FYI. From Heritage Foundation (where I got corn price data), a conservative think tank.
How Rising Gas Prices Hurt American Households
Karen Campbell, Ph D
The upward march of retail gasoline prices has affected U.S. households regardless of whether their members drive, take public transportation, or walk. In a modern economy, the interdependency created by supplying specialized labor and trading for all other goods and services produced by other people leaves virtually no one unaffected by the price of gas at the pump.
Read the complete article at: http://www.heritage.org/Research/Economy/bg2162.cfm
26 Robert Essian // Jul 15, 2008 at 5:34 am
KV, obviously you are a bright fellow as well as all of Jim’s readers. I enjoy everyone’s articles. All obviously have researched and care about our inevitable future. We understand our future fate. Now what to do about it.
Let me share something that my Mother would say to me before speaking before an assembly: “Keep it simple or you’ll lose the ears of the people you are trying to inform”. The point is allow the message to be heard by everyone so everyone (hopefully) will discuss it and make the necessary changes in their own lives for the greater good.
KV, you’re passionate, I get it. I respect that and your message is based in logic and intellect, it just hurts my ears a little.
The message boils down to supply and demand. Keep it simple and maybe we can get this done in less than 20 years.
I have seen poverty throughout my life and would not wish that on anyone. Our message must be clear our actions decisive and our hearts open.
Bantering semantics clouds the message.
Your friend.
27 KV // Jul 15, 2008 at 7:26 am
Robert Essian,
I take your thoughts kindly, but as you pointed out, my writing style is crisp and usually logical (at least, I try). Misconceptions, sugar-coated and repeated again and again, until they become dogmatic facts, is the major problem. We face “trust me” syndrome.
I strongly feel that it is not supply and demand that is driving oil prices. There is ample supply, Saudis say so, OPEC says so, and there are no shortages, brownouts, nor gas lines, and Iran can’t even sell the heavy oil so it is stored in tankers in the Persian Gulf.
Saudis have repeatedly said that dollar depreciation is the cause of oil price increase. Concurrently, oil futures with leverage of 180:1 are creating artificial shortages and driving up the spot oil price.
Sub-prime fiasco was based on the same thinking. Like oil today, house prices were never to come down, so we could loan 110%! Nor we need to check credit worthiness or accuracy of the loan data, as we can always sell the house higher than mortgage taken. With this, add cost of wars and perpetual deficit spending. Basically, our financial system is under extreme strain, dollar can totally collapse, and with that, demand for oil and most everything.
For the record, last night, I went to Prof. Perry’s blog. All he does is compute the cost of 1000 gallon of gas today and compares with 1980’s to make this point: Record High Gas Prices? We’re Still Not Even Close. He does not ever mention anything remotely about the impact of oil price on consumer. I take back my comment that Prof. Perry distorts statistics.
You really have to read the article by Karen Campbell of heritage Foundation (cited previously) to understand how pervasive the impact of oil price is on consumer.
Sorry for hurting your aching ear.
28 Robert Essian // Jul 15, 2008 at 12:22 pm
KV, I have read all that you have mentioned. On the basic point of supply and demand we must agree to disagree. It doesn’t matter who is right or wrong. My fear is if it’s somewhere in between we are still talking the same language.
When I look out at the world I do see hoarding, I see heavy oil that we (world too) can’t refine. A telling sign that this oil came from overdeveloped fields or immature ones. I see riots and starvation. Friends, neighbors and world citizens are not being provided necessary food and energy. They can’t afford it. My conclusion then must be if it looks like a duck, walks like a duck then…Your friend
29 paultaut // Jul 15, 2008 at 10:00 pm
MRE’s, stock up on a year’s worth. It will be worth it in the future.
Next years’ world supply will be less, if next years’ demand is the same or even slightly higher, oil will go to the highest bidder.
Today’s activity gives one an approximation of the Speculative Value of Oil: $7. This coupled with the current war jitter value turns these 2 components into about $20.
It looks to be an active hurricane season, a value has yet to be assigned. Start watching Brent for the actual worldwide demand as the WTI contract is in the midst of a witch hunt.
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