Oil Oil Oil
I was waiting until the price of oil hit $100 to discuss it, but since it doesn’t look like that will happen for a while, I’d better write about it now. If you recall, a couple of weeks ago oil prices hit a $98 high. I would have put money on it rising to $100 by the end of the year. That is, until OPEC announced it produces 3-4 M barrels in excess every day. I find the political, social, and economical factors that factor into the price you pay at the pump to be extremely fascinating. But I’ll get into those in a later post.
Now I want to share something I read in a economic publication about the affordability of gas as a percentage of disposable income. From Professor Mark Perry at University of Michigan’s School of Business.
I wrote about the relative affordability of today’s $3 gasoline, measured as share of disposable income. After the Federal Reserve released data today on third quarter household net worth ($528,000 per household), I thought it would be interesting to look at the cost of gasoline as share of per-capita household net worth.
Using data on household net worth from the Federal Reserve, historical gasoline price data from the EIA, and population data from Economagic, the graph above show the historical series of 1,000 gallons of gasoline purchased at the average retail price in a given year, as a share of per-capita “household new worth” in that year.
In 1949, the retail price of gas was only 27 cents, but it took 4.2% of per-capita new worth to purchase 1,000 gallons of gas, making gasoline almost three times as expensive then compared to today, when it only takes 1.44% of per-capita net worth to buy 1,000 gallons of gas at $3.
To be as expensive as gas in 1981, measured as the cost per 1,000 gallons as a share of per-capita net worth, gasoline today would have to sell for about $6.50 per gallon.
Bottom Line: Gas today, even at $3, is relatively affordable and is actually cheaper than the decades of the 1940s, 1950s, 1960, 1970s and 1980s, when the price of gas is measured relative to our increasing household wealth. Goldilocks can handle $3 gas.
The more you learn..
