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Fluctuations in gas prices not all that unusual, expert says

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Don Fullerton, a finance professor and former deputy assistant secretary of the U.S. Treasury Department, says the real, inflation-adjusted price of a gallon of gas has barely budged over the past five decades.

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3/31/2011 | Phil Ciciora, Business & Law Editor | 217-333-2177; pciciora@illinois.edu

CHAMPAIGN, Ill. — Rising gas prices are making front-page news across the country again, with the price at the pump above $4 per gallon in some areas as the summer driving season revs up. Although consumers may be pained to hear that prices seem headed back to levels not seen since the summer of 2008, they can take comfort knowing that, adjusted for inflation, the real price of a gallon of gas has barely budged over the past five decades, according to research by a University of Illinois energy policy expert.

Don Fullerton, a finance professor and former deputy assistant secretary of the U.S. Treasury Department, says recession-weary consumers should consider the historical, inflation-adjusted price of a gallon of gas, which may take the sting out of filling up the tank – or at least offer cold comfort.

"Correcting for inflation, the 'real' price of gasoline in 1960 was $2.33 per gallon," said Fullerton, a researcher with the U. of I. Institute of Government and Public Affairs, and with the Center for Business and Public Policy in the College of Business. "From 1960 to 2009, the real price of gasoline only changed from $2.33 to $2.42 per gallon. That's virtually no change in the real price at all."

From 2009 to 2011, however, the real price did increase, from $2.42 to $3.56 per gallon. Although that increase feels steep for consumers squeezed by the Great Recession, the increase may only be temporary, as volatile upward and downward price swings can be found readily throughout the historical price trends of the past half-century.

Recall, for example, that gas prices peaked at more than $4 per gallon in July 2008, but plunged below $2 per gallon by December when demand fizzled amid a global recession.

"The nominal price of gas has risen to about $3.56 per gallon. Although that feels like it's breaking the bank, in 1980, the real price was $3.35 per gallon, so the current price isn't that much different from previous upward blips," said Fullerton, an expert on the economic impact of environmental regulations. "So changes in prices at the pump – even upward blips that seem monumental at the time – are not all that unusual."

In the past, spikes in gas prices have elicited howls from lawmakers about lowering the federal gas tax to help consumers. But Fullerton says the tax has followed a similar inflation-adjusted course since 1960.

"For many years, the nominal rate for the gas tax was 4 cents per gallon, and was eventually increased by various increments to 18 cents per gallon today," he said. "But inflation has changed the real value of that tax rate as well. In 2011 dollars, the 4 cents per gallon tax from 1960 is equivalent to 29 cents today. So the real gas tax has fallen from 29 cents per gallon 50 years ago to only 18 cents today. The price of gas may be rising, but it's certainly not due to any increase in the federal gas tax, which is actually falling in real terms."

Although gas prices are sensitive to any change, real and perceived, in supply or demand, ultimately it's difficult to pinpoint any one geopolitical factor as decisive, Fullerton says.

"We can always point to shifts in demand, like the growing economies of China and India, as well as to shifts in supply, like the shutdown of production due to unrest in countries in the Middle East and North Africa," Fullerton said. "But it's very difficult to sort out the net impact of each factor because the price of gas is affected every day by so many different variables."

Fullerton heads the environmental and energy economics program for the National Bureau of Economic Research, a nonprofit, nonpartisan think tank that provides economic analysis for government, business and the academic community.

Editor's note: To contact Don Fullerton, call 217-244-3621; e-mail dfullert@illinois.edu.
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