What Exactly Concerns Us About Gas Prices?

There’s no doubt that Americans are currently frustrated by high gas prices. And certainly many voters believe that “something oughta be done about it.” But why? Here’s a simple taxonomy of concerns:

1. Relative prices: Are people frustrated that a gallon of gas now requires more foregone “stuff.” Or alternatively phrased, are they concerned about the low relative price of “stuff”? Stated this way, it sounds a bit odd that we are so upset that the benefit of giving up one more gallon of gas is now a heckuva lot more stuff. (Indeed, environmentalists should be thrilled.)

2. Absolute prices: Are people concerned about the change in the absolute average price level? The consumer price index is currently 216.632; is this too high? If so, what is the right average price level?

3. Real wages: Is the real concern about the average price level relative to (nominal) incomes? That is, if the average price level rises but our money incomes stay the same, we tend to cut back on both gas and “stuff.” If so, I have some good news: money income typically rises roughly in tandem with the average price level, keeping the real wage constant. And if you think the current episode will be an exception to this rule, then are your concerns about the gas market or the labor market — and does this change what “oughta be done”?

4. Inflation: There are also concerns about the rate of change of gas prices (#2 is about the level, not the change) and how this may impact inflation. However while gasoline and oil futures markets suggest that current high prices are here to stay, they aren’t expected to continue rising.

5. Reallocative costs of changes in relative prices: In the long run we will learn that a Pruis does as good a job at getting you to work as a Hummer and at a much lower cost. But in the short run, it will be expensive to shut down Hummer production and expand Prius production.

6. Redistribution due to changes in relative prices: It is unsurprising that the loudest gas-price whining is coming from those in the exurbs whose house prices have fallen due to higher commuting costs. But what is missing here is the urban homeowners who have simply kept quiet about their gains. In many cases one group’s losses are roughly offset by another group’s gains.

#4 is the focus of discussion by serious macroeconomists, although inflationary concerns should not be overstated; #5 is important, but in popular discussions it gets too easily confounded with #3 and #6. And because we rarely see pictures of workers enjoying their compensatory cost-of-living wage rises or investors in urban housing or green companies rejoicing that their investments have paid off, too often we focus only on the losses but miss the gains.

My favorite is a behavioral variant of #3: wages will probably continue to rise in line with the average price level, but when each of us gets our wage rise, we think that this is a reward for our hard work and not something as trivial as a cost-of-living adjustment. So each year we think that our employer realizes we are ever more brilliant, even as rising gas prices steal more from our paychecks. But workers should be tipped off that it isn’t just a coincidence that each year these two forces tend to balance out. (More: see Shafir, Diamond, and Tversky.)

This leads me to think that we are over-emphasizing the importance of high gas prices. What have I missed? And what exactly worries you about current high gas prices?
See my commentary on NPR’s Marketplace for more (or just listen here).


David

the answer man Dave,
Party leaders in Washington all have there heads up you know where. When the US talks every country is listening. Solution,---Continue talking and take some action about alternative fuels wind, Hydrogin, solar etc. Start drilling in the gulf and tell the world. In the next few days gas prices will plumet. When will our stupid leaderein in washington come out of there little think box.
Ok Ok you're right, probably never

Diana Lynn

The problem with energy/gas inflation is that real wages have not kept up with it, and it is doubtful that they will begin to catch up when even the big Wall Street players are feeling the hurt right now. While we're arguing over our individual pocketbooks, has anybody been paying attention to the hits the Big Boys are taking? Stay tuned for things to come!

An honest economist will ask why the dollar is devaluing and will educate the public as to the history behind any country that de-pegs its currency. We aren't seeing prices reflect increasing values, we're seeing prices reflect a weakening dollar. True, high gas and energy prices will force a sort of de facto rationing that may be cause for environmental celebration. But do we want to start rationing our food? Healthcare is already a mighty mess, and there's no reason to think that other "staples" won't follow if we keep mismanaging everything and letting monopolies buy out all the competition that would otherwise keep the market honest (witness the insurance companies in Florida and how they essentially colluded to deprive homeowners of their policy obligations. It took the state stepping in to introduce a citizen-run insurance competitor to restore the incentive to play a fair game. Likewise, we have allowed so much collusion in the marketplace that essentially we have a predatory market, not a free market in many key industries, energy possibly among them.)

If everything else goes the way healthcare has -- and now gas -- you won't have to be an economic bottom feeder to start feeling the pain trickle UP. Therefore, the people who have responded to this blog post to note what these gas prices already ARE and will continue to do to the price of all the goods and services that rely on freight, rail, trucking and other petro-dependent transportation costs are right. Although things will eventually level out in the long term, the current term is what we are living with: an inflationary Domino Effect that increasing energy costs are a harbinger of. But take heart! At least before the entire economy collapses a few energy barons will get rich at our expense. However, when there is no one left to poach, they too will suffer. It's a dangerous gamble the Big Fish are taking. All of which is to say: If an economist wishes to come clean about the Big Picture instead of deflecting public attention to small, disjointed aspects of the overall problem, let me know. I, for one, have had enough of the media and the so-called experts playing dumb. Flippancy is the refuge of the ignorant or the elite. For those of us living in the real world, demanding answers over debates would be a better use of our time. After all, livelihoods -- not just pocketbooks -- depend on it.

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liz

it's one thing to support rising gas prices for environmental reasons (which i do, completely), and another entirely to be in a situation where you're still paying off the oil company for february's oil bill, worrying about how in the world you're going to afford to heat your house next winter, and facing an increase in your monthly costs for gasoline when you were already living check-to-check. i'm wondering if there are a lot of other people in the same situation i am, resulting in a collective panic.

David Pearson

What? Cheap travel is not one of my inalienable rights?

Matthew

My biggest concern is that by the time I'm finished with school and have saved enough money to go see the world that it'll be infeasibly expensive to go see the world and I'll be stuck in this corner of the South Pacific (New Zealand) for the rest of my life.

chrisfrenzy

The problem is that we Americans are completely unaccustomed to making sacrifices of any kind. We've enjoyed relatively low-cost gas for decades, which made us ignore the fact that our average MPG is much lower than the world average. We've never demanded mass transit, refuse to carpool, and see conserving energy as a wacky liberal idea. The fact is, it's not.

Who says everybody gets a car? The Constitution? The Bible? No. We've all enjoyed the luxury of car ownership with little sacrifice. You can say that people are freaking out now because of the sheer size of the increase in the cost of gas. But the real pangs they're feeling are about buying power and the specter of sacrifice.

The real danger is that American society is so used to consuming goods that we'll keep buying at the same level and go deeper into debt. Thanks to the mortgage crisis, the fantasy that tax cuts are good government, and the absurd notion that buying more helps us "beat the terrorists," Americans see consumption as the definition of "the pursuit of happiness."

The reality is we should scrutinize every purchase we make, thinking of its future impact. That means ditching our gym membership and walking to the store or putting off buying a second flat-screen TV.

There is only so much oil in the ground and the dispensation of it will be handled by very powerful people. The transition to alternative energy sources will not be smooth. Meanwhile, the bill for our personal VISA and the appalling war in Iraq are going to come due. And getting to whatever life holds next is going to take more than a little sacrifice.

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dav

#3!!! It's great that on average wages will keep up when average prices go up. That, however, is no help to me. When averages prices go up I'm pretty much guaranteed to take a hit but if average wages go up it's a dice roll whether that means anything to me or not. I'd love inflation if my wages were guaranteed to go up, but I don't want to roll the dice.

Someone else must have gotten my pay raise, I just took a 10% pay cut.

bulgarian solicitor

Most of the 1st world has a massive entitlement complex, supported by populist politicians and the pandering media. Even in this _relatively_ educated forum, my suggestions that all fuels should have an 'environment tax' added and put into remediating all the damage their use causes were met by howls of blue murder. Its like people think that somehow current energy prices are 'correct' and paying more is stealing some sort of birthright. The truth is, mispriced energy has led to massive abuse and waste that has literally stolen the birthright of future generations to a planet as healthy as the one their grandparents inherited. Markets only serve us well when costs reflect the entire true cost - not just the part people want to pay for.

Bjork

I generally agree with the article. But remember that:

- There's at least a one year lag for wages to rise to meet rising price levels through inflation.

- Low inflation is favored by most economists, and major increases in fuel costs would move inflation out of that "comfortable" range.

- Moderate inflation has other negative economic consequences including expectation of future inflation, dampening of credit, etc.

So... on the whole... we should be concerned about the inflationary impacts of rising fuel costs.

aaron

Here's what I said two years ago

I believe that the reason we don't often hear a lot of complaining about inflation is because inflation is usually focused on the rich and middle-class. While there has been mild inflation, people in the lower income brackets have been affected less than the upper. In fact, while income was flat (slightly increasing) over 2000-2003 for the lower income brackets, expenses were also flat and actually decreased some. This is because they purchase from a different basket of goods, and because many of the products they buy may be easily substituted. Gas, however, is a larger portion of expenditures for the lower income earners than the upper income earners. It is also one of the expenditures that is not easily substituted, so gas price increases cut into disposable income.

Gas prices cut into the disposable of the lower 60% of earners, who have less disposable income to begin with. So you are affecting a lot more people, and people who are affected more, than most other price increases.

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Adam

I think you really have missed the point in turning an issue that will likely increase hunger-related deaths around the world into intellectual devil's advocate. This is a real concern that impacts not only the less fortunate in the States, but even more so those who rely upon food aid in sub-Saharan Africa and in other parts of the world. Hence, I think it is not economic concepts or models that are troubling so many people, but the simple fact that it is increasing more difficult to put food on the table (for those who have a table). The majority of people simply do not understand why in my opinion. These people, not the intellectual elite, are the ones the mass media are designed to speak to as they are the majority of the population.

Personally, I think the rapid increase in oil prices is of concern for a few reasons: falling home prices, rapidly growing unemployment, an extremely weak dollar, low relative wealth due to an increased cost of staple goods, increased average healthcare costs, and as you mentioned, unsustainability in our transportation infrastructure, to which there is often no solution for some Americans. To exacerbate the issue, higher gas prices are pumping even more money out of the US economy and into the house of Saud and others, creating a vicious economic cycle. The small but growing number of green companies out there are hardly the majority of people, they too are the elite who typically charge a premium for goods and services; I believe that is why they get so little press.

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T

The rate of change was pretty dramatic this year, as mentioned in many of the comments. It's pretty darn hard to change much behavior to use less gas in most of the USA too. Most places are car-dependent and lack public transportation, so changing modes of transportation is not easy. Changing from an SUV to a Prius sounds like a no-brainer, but also not easy. You first must sell you SUV, which are extremely unpopular, good luck selling it at a decent price. Then Priuses have large waiting list, or you can buy a used one at a 20% premium. All of this takes time and money. OK, maybe you can move, but housing market is down the tubes, good luck trying to sell your old place so you can live closer to work or public transportation.

Right now it seems like oil prices have stabilized, but news saying that demand for oil from China and India will continue to rise, which can push prices up, not to mention some weird Nigerian/Saudi Arabian/Venezuelan, or even a Katrina-lie hurricane knocking out oil well, some event that suddenly pushes prices up. So if gas prices rise at the same fast rate it already has, let's say $0.50 a month for the rest of the year, well a lot of people like me will be quite panicky, including me given the inflexibility my options are (and I drive a small car). Thus the attitude by some, "Something must be done," since all the other options will take much time and energy.

So Dr. Wolfers, any recommendations on what we can do? Other than to try increasing our wages, or hope that our wages will increase? Maybe some cost-benefit analysis on some of the options I listed? Seriously, we really really could use some help. We are here telling you why gas prices matters to us, as you ask. I ask, suggest some options we all missed or at least some cost/benefit analysis of available options. Or how about Kiva-like (ie small interest) loans for fuel efficient cars?

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tom

do something now - gas up to .$ 90 off per
gallon after the cost of the product - ethos.
proven worldwide over last 10 years,money
back gaurantee. www.forearthonline.com/talkwithtom

CWC

We're concerned because we'd rather not pollute the planet, pay through the nose for fuel or support a bunch of people that would love to blow us away. Oh and then there's the dictator government that won't let us grow efficient fuel in the USA. Don't let them lie to you about there not being enough farm land. We have over 100 million total farm acres in the USA and only use about half. The half that's not being planted is more than enough to grow ALL our fuel. Not only that but the government is still paying farmers not to plant. Watch the video titled "HEMP FUEL Can Supply All Our Energy Needs" and read the article titled "Marijuana Facts The Government Does Not Want You To Know" on the website referenced at the bottom of this post.

Hemp can produce several different kinds of fuel. In the 1800's and 1900's hempseed oil was the primary source of fuel in the United States and was commonly used for lamps and other oil energy needs. The diesel engine was originally designed to run on hemp oil because Rudolf Diesel assumed that it would be the most common fuel. Hemp is also the most efficient plant for the production of methanol. It is estimated that, in one form or another, hemp grown in the United States could provide up to ninety percent of the nation's entire energy needs.
Source: Schaffer Library of Drug Policy

Hemp is 4 times more efficient than corn as biofuel. Hemp pellets can be used to produce clean electricity.
... so powerful it could replace every type of fossil fuel energy product (oil, coal, and natural gas).
... This plant is the earth's number one biomass resource or fastest growing annual plant for agriculture on a worldwide basis, producing up to 14 tons per acre. This is the only biomass source available that is capable of producing all the energy needs of the U.S. and the world...
Hemp will produce cleaner air and reduce greenhouse gases. When biomass fuel burns, it produces CO2 (the major cause of the greenhouse effect), the same as fossil fuel; but during the growth cycle of the plant, photosynthesis removes as much CO2 from the air as burning the biomass adds, so hemp actually cleans the atmosphere. After the first cycle there is no further loading to the atmosphere...
Source: USA Hemp Museum

JOIN THE EMAIL LIST, WATCH THE FUEL VIDEOS:
Internet Explorer: http://jsknow.angelfire.com/home
Other Browsers: http://jsknow.angelfire.com/index.html

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bridget

"If so, I have some good news: money income typically rises roughly in tandem with the average price level, keeping the real wage constant."

HA! What a joke. Please, O pampered NYT writers, show me somebody in the real world who has seen such a compensatory wage increase. I know I haven't gotten any 267% cost of living raises over the last 7 years.

And that's not even to mention the intellectual dishonesty of using the CPI to talk about the way gas prices affect real people when the "core rate" of inflation referenced by the CPI includes neither energy nor fuel prices on the "logic" that they're just too "volatile". When the assumption you're trying to disprove (i.e. "energy & food prices are volatile and can quickly become very expensive") is built right into the methodology of the statistics you use, it kind of seems like you've defeated your own point.

I'm sorry, I usually love the Freakonomics blog but this piece is too glib and clever by half. It's economists like yourself saying things like "The consumer price index is currently 216.632; is this too high? If so, what is the right average price level?" that erodes public trust in economists and builds public support for terrible ideas like the gas tax moratorium.

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Laura

Urban homeowners keeping quiet about their gains !?!

I'm really feeling the gains here. Packed buses at all hours of the day, but a poorly funded city transportation system that cannot expand its routes to meet demand (why yes, I do live in Philadelphia! However did you guess?). Increased prices for things like fresh produce that must be brought into the city by vehicles that run on gas. Fewer visits from friends and family who drive into the city, because public transportation from where they live is nonexistent or impractical. And more difficulty gaining access to a car when I do wish to use one - Philly CarShare is getting a lot more use lately, cabs have increased their fares by a noticeable amount, and I'm wary of asking friends for a ride anywhere because the cost of the ride doesn't strike either one of us as worth it.

Am I missing other reasons that city-dwellers are celebrating?

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Jim N

I saw an article once about a good way to gauge gas prices. The article laid out a formula where you looked at how many hours a day you need to work to pay for your commute. I live close to my job so it works out to about 7 minutes a day of work to pay for my gas to and from. I would be interested to see a report on the national average if the data is available.

Cean Shelor

Reason # 3! Ding Ding Ding Ding! WE HAVE A WINNER!

Hello-oo!? Things cost more when it costs more to ship, plus it costs at least twice as much as it used for me just to get to work. Then there's always the thought that this is just the tipping point, and things will progressively get worse. We're all trying to cut back in this 'ever expanding' economy we've been built upon.

Every-darn-thing I pay for is double to triple in price "due to rising transportation costs" -if not just for general purposes- and you propose more than half a dozen reasons folks might be objecting?

We raised our kids and sent them to college, and now we may have to borrow from them eventually just to keep above poverty level in our old age. I've been prudent and saved, but never saw this coming.

taxon man

#6 brought up a large missing reason for public outcry but it wasn't stated succinctly.

People feel manipulated and powerless to prevent what they perceive as a few rich and powerful people robbing from their standard of living by reducing oil production.

The public makes perceptions about these things. For instance after Katrina gas prices should have come down but they never did. The public feels gas prices will only ever go up and that producers will use any and every excuse to raise prices. I would be personally surprised to see them go down myself because the producers are beholden to earn profits.

But really..the worst future that will happen is that government will have to subsidize loans that have been put in place to help people buy gas, just like they already have to do for homes and education.

Homer

As we all know, there is nothing we can do to control the prices at the pump. Cutting back on driving and making only necessary trips is the way to conserve. I also stumbled across a website that talks about fixed price gasoline. GasBankUSA, http://www.gasbankusa.com has a plan to lock in a price for gas even if the price goes up.