Lynne Kiesling
Glen Whitman has a nice analysis of gasoline expenditure as a share of household income. Note that he shows, by income quintile, how the cost of traveling 25,000 miles in a year fell from 1981 to 2000, and that although it rose through 2005 and fell back a bit in 2006, it is still below the 1981 peak, and well below the peak for the bottom quintile of the income distribution.
His argument is a better-researched set of evidence on the same point that I argued in this post and this post from August 2005: in addition to the inflation adjustment to get the proper price comparison with 1981, it’s important to acknowledge that gasoline expenditure as a share of household expenditure, and as a share of household income, has fallen.
It’s still shocking to be paying $3.52 a gallon when 3 months ago I was only paying $2.39, even if it is still better the bad old days of 1981.
It is the volatility of gas prices that is so shocking.
Electricity is much the same way in real terms. The peak of real electricity prices was in 1982, and they decreased almost uniformly until 2000-2001. Eighteen years is definitely long enough to build long-term expectations. But some of what is going on now in electricity *is* volatility, and as much as people are bitching about it, I do notice that it’s bringing about some proper responses.
In response to some of the abhorrent studies of retail rates that have been done recently [and their echoes around the place where I work] I did some work dividing the country up into areas different from the common regulated versus deregulated divisions. I had been asked why some areas have been hit harder than others by fuel-price increases. I split the states two ways: those that are oil/gas heavy versus areas heavier in coal and nuke; and those where price is average-cost based versus where price is marginal-cost based. This is very inexact, but it showed my point that both the fuel concentrations and the price-setting mechanisms are important. But that left open the question of which situation was really “better.” I’m not sure I made the case I wanted; it probably convinced the asker that markets could be double-trouble. It’s a matter of perspective.
At the pedestrian level it’s hard to make the case that high or volatile prices are sometimes better. What’s good about a rude and painful awakening to an individual? Not much is good about the awakening; it’s the long-term effects of volatility on shaping expectations and evasive actions. That will probably never make individuals feel happy about the volatility, but they’ll begrudgingly behave in more productive ways… as long as the high prices and volatility continue. It was really disheartening to watch how quickly the country forgot its energy lessons after 1982.
Energy is expensive right now, and it’s hard to imagine anything other than a painful calamity suddenly making it cheap any time soon. There is not some natural state of physics and divine beneficence that makes cheap energy available for the happiness of homo sapiens. We [h.sapiens] have conflicting trends of population growth, energy scarcity, and environmental issues. And we in the U.S. have a population that believes in some sort of providence that cheap energy is a birthright, and their politicians are willing to act accordingly. In truth, we don’t know where we’re headed, but I’d feel better about the direction if the population is seeing prices that properly reflect scarcity. It may be a necessity.
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