I realize that we have suffered some rather dramatic price increases in gasoline, but I also think that some of the impact may be more psychological than real. As we approach the dreaded "$4 per gallon" we start to think that gasoline is exorbitantly expensive. However, I recall that other prices have risen just as much, yet received less press. For example, thanks to inflation and taxes, a pack of cigarettes that cost $0.95 in 1984 are now well over $5 today, $6 in many places. Likewise, I recall eating a meal for $2 in 1986, while the same grade of restaurant (admittedly not a fine establishment) would be well over $10 today. I also recall that $10,000 was expensive for a car in the 1970's, while it is hard to find a car for under $10,000 today.

So, to see how much of our fuel fear is real, and how much is based on a temporary up tick, I picked an arbitrary year (1965) and decided to look at what fuel costs were then versus now. Of course, I didn't actually look at just fuel costs, as we don't buy fuel for the sake of fuel, instead I looked at the use to which we put fuel, driving. So, I asked, what percentage of income was required to drive 1000 miles in 1965, and what percentage at $3.50 per gallon and at $4.00 per gallon today.

As inflation has changed money values, I decided to measure this as cost to drive 1000 miles as a percentage of mean or median income. Since numbers for 2008 and 2007 are not available, I am using 2006, which actually makes the numbers look a bit worse than they should be, but they were the only numbers available. So, using figures from the census bureau, 1965 median income was $6957 per household and mean income was $7704 per household. In 2006 median income was $58,407 and mean was $77,315. Using the best figures I could find, and there aren't great figures available, the estimated MPG for cars on the road in 1965 is about 15 mpg, and in 2005 about 28 mpg. Finally, it appears that gasoline was selling around $0.30 per gallon in 1965.

Using these figures, it took about $0.02 to drive a mile in 1965. Using $3.50 per gallon in 2006, that puts it at about $0.125 per mile, and at $4.00 per gallon at $0.143 per mile. So, to drive 1000 miles in 1965 cost $20, at $3.50 per gallon $125 and at $4 per gallon $143.

Using mean and media income, in 1965 it took 0.28% of median or 0.25% of mean income to drive 1000 miles. In terms of 2006 income, using $3.50 per gallon, it took 0.21% of median and 0.16% of mean income to drive 1000 miles. Even at $4 per gallon it would take 0.24% of median or 0.18% of mean income.

So, yes, we have seen a sudden rise in the cost of gasoline, but, in terms of the percentage of our income it takes to drive a fixed distance,w e are still better off than people were in 1965. We are a bit worse off than we were when gas was $3.50 per gallon, but we are still getting more miles per constant value dollar than we did in 1965. All of which makes me think that this worry is a bit silly.

Now, I am not saying that we are not spending more on fuel than we did in say 2005 or 2004, but, on the other hand, we are spending less than we would have in the past. As in the housing crisis, very favorable recent conditions make a return to normal levels seem a crisis. Houses rose 200% to300% between 2000 and 2007 in some markets, before they fell something like 20%. Seeing only the price decline, some choose to call it a crisis, forgetting the previous rapid inflation in prices. Likewise, fuel prices were very low for a long while, and are now rising to more reasonable levels, leading many to call it a crisis.

Of course, this push for ethanol is making costs of food rise, and making fuel more expensive than it was. However, if we dropped taxes, allowed domestic exploration, dropped the ethanol requirements, and allowed new refineries, we would be better off still. It is a bit shameful that we have progressed so little since 1965, but, on the other hand, we ARE still better off than we were in 1965, so to call this a crisis is just absurd.

NOTE

I picked 1965 quite arbitrarily. Looking at the numbers, 1964 would have made the numbers even more favorable, as income rose very little from 1964 to 1965, while prices did rise. On the other hand 1966 would have made the numbers slightly less favorable as wages rose significantly faster than prices between 1965 and 1966. However, having chosen 1965, I stuck with it.

I would also note that using 2006 figures and 2005-6 fuel economy skews the numbers to make them look slightly worse for the present. Present incomes are well above 2006 levels, and fuel economy has risen quite a bit from 2005-2006. Given that, my numbers are actually more negative than the reality.

I would also point out that this "crisis" mentality, leading to such idiocies as threats of windfall profit taxes, mandates of higher ethanol percentages, and others, may actually serve to make things worse, causing prices to rise more. The best solution to today's increase in prices would be to remove the impediments to the free market, as well as restrictions on domestic exploration and refining. Anything else, especially confiscating profits, will do nothing to lower prices, and will serve no end but buying votes for populist demagogues.