A Fresh Look at Gasoline Prices

Surging gasoline prices would have to go still higher — perhaps up to about $5 a gallon — to repeat the economic turmoil sparked by high prices in the 1970s and early 1980s, according to an analysis by one petroleum expert.

Michael Economides, a professor at the University of Houston, cites a more energy efficient economy. “When prices go up they don’t have the same impact as they did in the 1970s,” he says. Simply looking at the inflation-adjusted cost of gasoline — a common measure used to judge the impact of higher gasoline prices compared with the impact of previous surges — leaves out important measures that have bearing on how much Americans are willing to pay for it, he says.

U.S. gasoline prices have risen since the end of 2003 amid strong global demand for crude oil, political disruptions in key oil-producing regions and refinery constraints. The average price for a gallon of regular gasoline this week is $2.91 a gallon, up about 78 cents from a year ago.

Some retailers with less affluent clientele, including Wal-Mart Stores Inc. and Dollar General Corp., have expressed concerns that shoppers may curtail their activity because of prices at the pump. Auto makers General Motors Corp. and Ford Motor Co. have seen sales of some of their most-profitable but least fuel-efficient models slide, hurting their bottom line.

Still, economic growth has continued apace, with other shoppers apparently taking up the slack and other auto makers reporting healthy sales. Gasoline demand in March was 9.1 million barrels a day, up 1.5% from last year. Many transportation companies have said they are able to pass on rising fuel costs with little economic effect.

Mr. Economides said improving fuel economy is one reason. A gallon of gas takes drivers farther than it did 30 years ago, though fuel-efficiency has flattened in recent years. “Our economy has also become more efficient, requiring a lot less energy to generate a dollar of wealth,” he says.

In 1975, for example, the ratio of gasoline consumed to the size of the GDP was nearly twice what it is today. Mr. Economides says this needs to be factored into the gasoline-price adjustments. Normalizing the price of gasoline in this way, he says, “shows the real ‘feel’ of gasoline costs. They are way lower than anything before 1985.”