Is the High Price of Gasoline Actually a Bargain?!

Commentary by Pete du Pont

The average price of a gallon of gasoline should exceed an all-time high very soon, according to government and industry analysts. Citing strong demand and tight supplies, they predict average prices could exceed $1.80 per gallon with the next 60 days. But before you start thinking that the price of gasoline is highway robbery, consider the real cost.

Historically, current gas prices are not that high. At the dawn of the auto industry in 1920, gasoline cost 30 cents per gallon; that's equivalent to $2.78 today. When adjusted for inflation the average price of gasoline did not fall below $2 per gallon for 26 years - until 1946. During the OPEC gas shocks in 1975, gasoline prices were still about $2 per gallon.

Then the oil shocks of the early 1980s drove real gasoline prices even higher -- $2.83 per gallon in 1981. And they did not get back below $2 until 1986. And in fact, real gasoline prices below $1.50 per gallon are a relatively recent phenomenon - occurring in only 12 years, all of them since 1987.

As the attached chart shows, for 64 of the past 85 years, the real price of gasoline has been more expensive than it is today.

Then there is the question of gasoline taxes. They also boost the price of gasoline. The Federal excise tax adds 18.4 cents per gallon and state excise tax rates on gasoline range from 7.5 cents in Georgia to 32.7 cents in New York - taken together, that adds 26 cents to the per gallon price of gasoline in Georgia, and more than 51 cents per gallon in New York.

Improved technology also has a cost - but in the case of gasoline, it's a cost reduction, since today's computer-equipped cars get much better gas mileage. In 1975, passenger cars achieved 13.4 miles per gallon (MPG) on the average. New passenger cars sold this year in the U.S. will average nearly 25 MPG. That effectively cuts the cost of gasoline per mile in half, so the cost of using gas has dropped substantially over time.

And when the cost of a product goes down, well, people use more of it. Americans have responded to the lower cost of driving by driving more. Between 1970 and 2000, the number of automobiles on the road increased 60 percent and the number of trucks increased 400 percent. What's more, the number of miles driven by Americans annually more than doubled.

Granted, fuel economy ratings for passenger cars have improved almost 87 percent over the past 30 years, but not everybody drives a "passenger car." Trucks and SUVs today make up a sizable number of vehicles on the road. It's also worth noting that one of every four cars on the planet and nearly 43 percent of all trucks can be found in the United States.

And that's not all. Even though the real price of gasoline is relatively low and technology improved average MPG, drivers began opting for safer cars - SUV's and mini-vans - that are larger and more powerful than passenger cars, causing average MPG to actually rise since 1988.

If gasoline prices were at a real record high and gasoline unaffordable, consumers would vote with their wallets and walk away from the pump or drive more fuel-efficient vehicles. But the economic truth is that consumers have recognized what a bargain gasoline prices really are.

So the next time you read in your paper that gasoline prices are "out of control" or "outrageous" or the result of "failed energy policies," think again. They may be rising compared to recent costs, but there is nothing negative about the ability to drive to work, or take your kids to school, or visit your mother. They are good things and available to us because gasoline is a bargain.