Knowledge Problem

The Fundamentals Are Basically the Same: A Reprise of Last August’s High Gas Price Posth

Lynne Kiesling

We leave on an intermountain West camping trip Saturday morning, so will be beyond the reach of communication technology for a fair chunk of the next week. But given that the underlying fundamentals have not changed substantially in the past year, even though the prices have, I am re-posting this post, this post, and this post from August, 2005, about gasoline prices. The comments on the original posts were good and plentiful, and I recommend them to you as well.

Aggregate post is below the break. Have a great week!


In KP’s three years of life there’s been a lot of coverage of oil and gasoline markets, and some dominant themes have persisted:

[Leaves professor mode, goes downstairs to make herself a well-deserved Manhattan]

OK, here’s the data to show that relative to median household income, gasoline prices have fallen:

Data used to create figure:

GINORMOUS ASSUMPTION MADE: The above graph assumes that the quantity of gasoline consumed per household has been constant over the past 25 years. This is a heroic assumption, but the BLS website was not sufficiently user-friendly to enable me to find data on household spending on gasoline in a useful form, and I desperately want to go downstairs and make that Manhattan!

OK, Manhattan in hand … here’s an analysis that improves on the first one. I’ve taken the ratio of [gasoline price x gasoline quantity] to median household income. The gasoline quantity data are from Table 5.13a of the DOE’s Annual Energy Review 2004, in thousands of barrels.

Table 5.13a reports “estimated petroleum consumption, residential and commercial”. That means that I am overstating the amount of residential petroleum consumption, which at least will bias the results in the direction I want; if I’m overstating residential consumption, I’m overstating residential expenditure, so if it declines, then we know that in truth the decline is even larger than depicted. The analysis would be more precise if I could break them out. But here it is anyway:

If anything, this decline is larger than just the ratio of gas price to median household income. Interesting.