Tuesday, April 22, 2008

How bad is it really?

When people are asked how they think the economy is doing, it seems the first thing they refer to are gas prices. Of course, this is only one small part of the whole picture, much like the price of M&Ms, (which has also increased, to my dismay!) The first struggle in understanding the price at the pump is viewing the problem in the context of the rest of the economy.

First of all, the unleaded gasoline that goes in our vehicles is only one of the several products derived from crude oil. Others include diesel, kerosene, and Vaseline (not even kidding). When the price of crude oil goes up, the prices of all of these other things go up. (Likewise, when the price of wheat goes up, so does the price of Wheaties). One thing that is amazing is that though the price of crude oil has risen 28% per year in the last 2 years, the average price of gas has only risen 12% per year. If gas had also risen at 28%, the average price today would be $4.62/gallon instead of the $3.50 we are presently experiencing.



Once you go beyond oil prices, you'll see that gasoline is not alone in this price climb. According to the Consumer Price Index, which is the somewhat "official" place to go for inflation data (a.k.a. why things cost more), the average price increase in all goods in the U.S. is about 3% per year. Compare that to the oil and gas price increases in the same time period (28% and 12% respectively). No wonder it seems like these things are skyrocketing in comparison to everything else--they are! (Some of you are trying to do math in your head right now. Stop it. Just trust me.)

Why does it seem like gas is so expensive? Because, if it had been following the rest of the economy, the gasoline that was $1.35/gal. in 2002 would only be $1.60/gal. today. So in other words, in comparison to oil prices, gas isn't that bad right now. However, in comparison to the rest of the economy, gas prices are horrible!

So why is it so stinking expensive! Tomorrow, my friend.

2 comments:

  1. H. Clinton2:11 PM

    You have captured my interest and I long for tomorrow!

    ReplyDelete
  2. I'm glad I have someone's interest. You know, another good indicator of inflation is gold prices. According to what I've seen, those have risen at the same rate as oil over the last 2 years.

    ReplyDelete

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