Inflation Tainting the True Cost of Gasoline

Published July 1, 2004

On May 5, a USA Today headline read: “Oil Prices Hit Highest Since Sept. 1990.” The story glumly reported, “oil traded for more than $39 a barrel last week … the highest closing price since 1990 and the 6th highest price ever.”

Good news: It isn’t true.

Yes, gas prices have spiked upwards by at least 30 percent in most local markets this year, and yes, it’s infuriating to pay $2.00 a gallon to fill up the tank. And yes, higher oil prices are a significant tax on the U.S. economy–given that we’re the world’s largest importer of crude.

But gasoline prices, properly measured, are nowhere near their historical peak. In fact, the long-term trend in oil, gas, and electricity prices is downward, not upward.

Inflation-Adjusted Prices Reasonable
What the reporter at USA Today and so many others forgot to do was adjust for inflation. In the world of economics, this is an unpardonable sin. After all, if you don’t adjust for inflation, just about everything is more expensive today than it was 30 years ago.

In inflation-adjusted dollars, gasoline prices paid at the pump have been on a steady rate of decline since the 1920s, with the exception of the 1970s, when we faced an OPEC embargo and gasoline lines. In 1920 the real price of gas (excluding taxes) was twice as high as today. Electricity prices were about three times higher 75 years ago.

If gas prices were as high today as they were in the late 1970s, we would now be paying about $6 a gallon for gas. Today’s price at the pump is lower than it was as recently as 1985.

Oil Reserves Remain Untapped
The same is true, by the way, for the cost of oil. Adjusted for wage growth, oil is slightly cheaper today than it was 20, 30, and 50 years ago, and five times cheaper than 100 years ago.

How can gas and oil be cheaper since we’ve used so much of it over time? Thanks to human innovation, we are always finding new sources of oil, while at the same time technology makes it cheaper to drill for.

For example, the oil fields of Prudhoe Bay in Alaska have two to three times more reserves than originally believed. Russia, now on the way to becoming a capitalist economy, may soon become one of the world’s top two oil producers, as the new Russian capitalist entrepreneurs continue to discover untapped fields.

Artificial Restraints Raising Prices
The economic evidence suggests that if Congress would only allow the development of new oil sources here at home, gasoline prices could easily slip comfortably below $2.00 per gallon.

When oil prices were $25 per barrel, we had the luxury of not drilling for more oil in Alaska. But now that the price is nearing $40 a barrel, with a good share of that money pipelined to Arab nations that are not always friendly to us (petrodollars have no doubt been siphoned off to terrorist networks in recent years), developing greater energy independence is no longer a luxury. In fact, it’s an economic and national security necessity of the first order. Any energy bill signed into law by the President this year must include the right to drill in Alaska.

Senator John Kerry (D-Massachusetts) has complained that Bush is doing nothing to contain gasoline prices, but Kerry has been the consistent adversary of people who drive cars. He has supported gas tax hikes of as much as 50 cents a gallon. He has also taken every opportunity to sink plans for drilling in Alaska, saying that drilling would endanger moose and elk. But it’s likely the biggest beneficiaries of Kerry’s intransigence on drilling have been Arab oil exporters.

High gas prices could be a thorny political issue as we enter the spring and summer months, when travel across the country rises. But travelers should take solace in the fact that we now pay less for gas, adjusted for inflation and wages, than our parents and grandparents ever did. That’s true even though the oil cartel, OPEC, forces the world price to be at least twice what it would be if there were a competitive marketplace at play. In Saudi Arabia and many other oil-producing nations, oil costs about 50 cents per barrel to produce.

The best way to break the back of OPEC would be to produce more oil here at home … if only our politicians would allow it.

Stephen Moore is a senior fellow at the Cato Institute ( His email address is [email protected].