As John Marble and I were discussing this week’s Thinking Grazier, he asked me to take a look at historic fuel prices and where they were today compared to the past. Of course, based on everything we are hearing in the news, it feels like prices today are outrageous compared to what they used to be. But…that’s not exactly what we found when I began looking a little deeper.
In his piece “Inflation Adjusted Gasoline Prices,” Tim McMahon includes the graph below comparing the cost of gas from 1929 to 2022. The black line shows the nominal price – the price before adjusting for inflation. The red line shows the price of gas adjusted for inflation – what it would cost in 2022 dollars. The graph was created in early 2022 before prices hit their current level, but it still gives us a good look at how prices today compare with prices in the past.
Tim writes, “When we look at gas prices from our own personal perspective we only see a small window of 4 or 5 years at most. Rarely do we even consider a 10-year time frame. Therefore, we might assume that gas prices “always go up.” But if we look at the big picture in inflation-adjusted terms we will get quite a different picture, as we can see from the chart above. Yes, the black “nominal price” was continually rising through about 2006 but even in nominal terms from 2012 through 2021, we’ve seen a pretty significant decline.”
The Money Illusion
In his piece for Market Watch, Rex Nutting writes “Gas prices are way up, but the real cost of driving a mile was higher for most of the past century.” He calls this the Money Illusion and reminds us of the importance of measuring today’s prices against how long it takes a regular person to earn the money to buy something. Nutting writes, “You’re suffering from the money illusion if you think that nominal prices are what’s important, instead of what your income can buy. It’s a matter of perspective. It’s like your smug granddad lecturing you about how a candy bar “ought” to cost a nickel, just as it did back in the day. But everyone knows a nickel isn’t worth what it used to be and we should start acting like we know it.”
To help us see what he’s talking about, Nutting breaks down how long it takes an average worker to earn enough to pay for a gallon of gas. “Gasoline cost $1.25 a gallon back in 1980, but the average worker was only making $6.75 an hour. It took the typical worker about 11 minutes to earn enough to buy a gallon of gas. Now with gas at $4.17 a gallon, it takes a typical worker making $26.94 an hour just over nine minutes to earn enough to buy a gallon.”
“Prices are relative,” Nutting says. “Context matters.”
What Can We Do With This?
Regardless of what happened in the past, we’re living in the here and now and gas prices are affecting all of us. Still, I find this information helpful for reducing the anxiety called up by all the news about how dire things are.
In addition, today’s problems have us talking about a better future, one where we’ve found ways to reduce the role energy and its cost plays in our grazing operations. John’s suggestions of strategies to change our operations to reduce reliance on energy gives us ideas for moving forward.
Thanks for reading!
How many people are making $27 per hour? The numbers always look better when fudged to do so.
Thanks for your note. Others may have the same question, so I’m answering here as well as to you directly.
The economist writing the story I cited was only looking at the average hourly wage. If you’d like to see the average hourly wage by state from 2019 (the most recent year I found in my 5 second search) you’ll find it here: <https://www.indeed.com/career-advice/pay-salary/average-hourly-wage-in-us>. It seems to bear out the number used.
I don’t mean to diminish the impact of high fuel prices on folks. This was simply about providing some perspective. We’re in a very interesting time, where Covid and war-caused inflation are combining to slow economic growth across the globe. I don’t know what the outcome will be, but I’m betting that these high prices are going to encourage growth in the renewable energy sector. That’s something that would be beneficial to all of us. But the growth pains will be difficult. I just hope we can all band together and help each other.
If you’d like to run the numbers for how long it takes you to earn the price of a gallon of gas, here’s the equation:
Hourly rate divided by 60 minutes = price earned per minute.
Price of gas divided by the price earned per minute = time it takes to earn enough to pay for a gallon of gas
Thanks again for writing and for being an On Pasture reader.
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