Pumping Gas: What Consumers See Is Different Than What They Get

The average retail price for gasoline sold in the United States increased by 7.6 cents per gallon last week. The price per gallon is more than 50 cents higher than a year ago at this time, and the summer driving season, with its increased demand, hasn't even officially started yet. As of May 17, 2004, consumers were paying more than $2 dollars per gallon for gasoline, on average. Prices are expected to remain at this level for the foreseeable future. None of this means, however, that gas is much more expensive than it has been in the past.

Despite record prices, the real price of gasoline has been trending downward. In inflation-adjusted 2004-dollars, gasoline prices are 26 percent lower than the 1981 high of $2.79 per gallon, the American Petroleum Institute (API) recently reported. This means that the real cost of gasoline to consumers has fallen by $0.73 per gallon between then and now.

However, as Tom Saler correctly notes in a recent article in the Milwaukee Journal Sentinel titled "Weighing Impact of Sky-High Fuel Prices," the "distinctions between real and nominal prices [unadjusted for inflation] are of little comfort to Americans chafing over another hit to their disposable incomes."

Crude oil prices also hit a high on May 17, 2004. A recent commodities report that appeared in the Wall Street Journal shows that on this date crude futures finished at $41.55 on Nymex-the highest close since Nymex began trading in the early 1980s. Yet, the article notes that in inflation-adjusted terms, prices have been higher. After the Iranian revolution in 1980, a barrel of crude oil averaged about $87 in today's dollars.

API data shows that from 1968 through October 2002, the refiner's crude oil acquisition cost was the highest and most volatile component of the gasoline price. For example, in 1981 crude oil accounted for 62 percent of the retail price as compared to about 44 percent of the pump price in 2002. Crude oil remained the major cost component in April 2004, at 45 percent of the retail price according to recent figures released by the U.S. Energy Information Administration.

OPEC used its market power in March 2004 to cut crude oil output by 1 million barrels per day. This has kept supplies tight and driven up crude oil prices. Given that the U.S. dependency on imports-more than 60 percent of the crude oil and petroleum products used daily are imported-if the OPEC cartel continues to reduce output, consumers will see prices continue to spiral upward.  It remains to be seen if OPEC will change its production quota when they meet again on June 3.

Second to crude oil prices, regulation and taxation comprise the next largest components of the price consumers pay at the pump. EPA's reformulated gasoline (RFG) rules, for example, account for many summertime price spikes.

Overall, compared with other common consumer goods, gasoline is a bargain. Information collected monthly by the Bureau of Labor Statistics and reported in the Consumer Price Index show that, while the price of gasoline has increased, the prices of other common products have gone through the roof. For example, between 1982-84 and 2002 gasoline prices increased 19 percent. But the price of bananas increased 64.5 percent; apples 131.5 percent; and college tuition and fees 276.9 percent.

Another relevant comparison is the consumer cost of gasoline per mile traveled. API notes that declines in real retail prices of gasoline coupled with improvements in vehicle fuel efficiencies reduced consumer fuel cost per mile driven during the 1980s and 1990s. For example, API reports that by 1998 the average real cost per mile traveled was the lowest measured since 1973.

Specifically, between 1980 and 1998 the fuel cost per mile traveled for passenger cars (in 2002 cents per mile), fell from 16.7 to 4.6 cents, while the costs per mile for vans, sports utility vehicles and pickup trucks fell from 21.9 to 7.2 cents. Preliminary data for October 2002 show these costs were up to 6.7 cents for passenger cars and 8.5 cents for vans, SUVs and pickup trucks-nearly the same as in 1997, but less than half as much as in 1980.

As consumers fill up their vehicles with gasoline, they may want to think twice before they yearn to return to 1981, when the price of gasoline averaged $1.38 cents per gallon. Adjusted for inflation this represents $2.84 per gallon-significantly more than today's already high prices.

Still, if Congress is serious about reducing high gasoline prices, it should reduce the regulatory burdens, such as EPA's RFG rules, that make production and distribution unnecessarily expensive. 

Charli Coon is Senior Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.