Blog Post

AEIdeas

At today’s price of $2.09 per gallon, gasoline prices in the US are the lowest in history, adjusting for increased fuel economy and higher wages as the chart above illustrates. At today’s average fuel economy of 25.1 miles per gallon, a typical car would require just under four gallons of gas, which would cost $8.32 at today’s price of $2.09. At the estimated average hourly wage today of $20.82, a typical worker would have to work for 24 minutes to earn enough pre-tax income to purchase the gas required to drive 100 miles, and that brings the “time cost of gas” priced in minutes of work to the lowest level in US history.

It’s therefore a great time for us to acknowledge and celebrate the importance of falling gas and oil prices, as Jeffrey Tucker suggests in his excellent and timely article “All Hail the Tumbling Price of Gas: The people against the powerful at the pump.” As Jeff points out, consumers should be especially happy about today’s low gas prices because there are many very powerful special interest groups who are very unhappy that gas prices are approaching $2.09 per gallon (and 43.5% below the $3.70 price in April) and that oil prices are below $50 per barrel.

As Jeff describes it, today’s low gas prices are an impressive tribute to the “marvels of the market” and he points out that there are at least eight very powerful special interest groups who benefit from high prices for gas and oil, and they hate today’s low prices. But even the combined power of those eight powerful groups hasn’t been able to counteract the powerful market forces that have brought gas prices down so quickly and dramatically:

Despite it all — and despite every effort by the world’s most powerful people — all the pressure is downward. It’s a shock, to be sure, but a glorious one. The low price comes about despite a vast and unrelenting barrage of policies and attempts to raise it. Think for a moment of all the powerful interests in the world that have pushed for higher gas prices only to see their ambitions frustrated by a reality they despise. 1. The environmentalists are desperate for higher prices because they are against driving and internal combustion generally, which they believe spoil the planet. They want us pedaling around on bicycles as in Mao’s China or enduring mass transit, or slogging from place to place on foot. They’ve been hectoring us about this for decades. A high price for gas is the best way to bring about their dream to discourage consumption. They cringe with every penny drop. “Fracking” is their F-bomb. 2. And don’t forget about the gloom-and-doom industry. It was only some 10 years ago that “peak oil” theorists were explaining to us how oil was running out and prices were going to soar. We’d better start hoarding, they said, because soon the pumps will be dry. How wrong they were. The new gloomers are all about the supposedly terrible glut of oil. 3. The oil industry itself is similarly unhappy with lower prices because they devastate profits and make it impossible to fund more drilling, production, and exploration. When the oil industry was closest to the presidency, under the Bush years — both father’s and son’s presidencies — it worked to keep prices and production high. Even war for oil became part of this strategy. The industry’s benchmark price is $100 per barrel of crude. But it has no power to make that happen. That’s because the oil industry doesn’t finally control the price of its product. 4. Some of the world’s richest and most powerful states, from Saudi Arabia to Russia to Iran to the United Arab Emirates, consider high oil prices to be their lifeblood. A US gas price that is double or triple the current one could mint a slew of new billionaires. As it is, the rich and mighty just sit watching the price and weep with their heads in their hands. How pathetic was the statement by King Abdullah of Saudi Arabia who said in a speech that he would deal with a lower price “with a firm will”? Will as much as you want, Your Highness, but it is not going to matter. Your will is not decisive. No one’s is. 5. In the United States, both states and localities depend on oil for their entire revenue stream. Politicians in places like Alaska, Texas, and Louisiana are actually in emotional meltdown about this price trend. If they could fix it, they would. 6. Then there are the urban planners — not to speak of legions of intellectuals — who loathe lower prices. They want prices to soar to punish all us drivers and get us to use their subways, buses, and taxi monopolies instead. That we keep insisting on sitting in our comfy bucket seats and driving these machines around makes them crazy. Low gas prices only encourage us to do more of what we love — and what they hate. 7. It’s been a huge priority for government generally to subsidize alternative energies, ones that don’t depend on fossil fuels. So long as gas remains affordable, alternative fuels will not get the boost that regulators want them to. 8. Then there are the central banks run by people who are convinced that falling gas prices are a bad omen of generalized deflationary trends. For five years, they’ve fought relentlessly against deflation, but there is a crucial thing they can’t control: the rate at which people themselves spend and borrow. There’s the rub. It’s because consumers haven’t cooperated that the Fed has not achieved its aims.

Jeff finishes his article with this excellent summary of “power of the market” and the “power of market prices”:

If the market price were a person, he or she would be the wisest, most clever, most powerful person on the planet, causing the multitudes, even the ruling class with enough weaponry to destroy the planet, to submit and bow down in awe. The simple and unassuming price — so humble and yet so decisive for human decision making — is this concise point of data, a mere number, that actually causes nations to rise and fall, topples the mighty, and humbles the arrogant with its truth-telling, rational, and yet unpredictable movements. Those who want to rule the world fear the market price for this reason, but peaceful people experience it as a gentle force that grounds our daily lives in reality in the midst of artificiality, pomp, and phoniness. The powerful can shake their fists at it, the intellectual class may curse it, and the moralists can denounce it, but no one can make it obey the dictates of those who purport to stand above it, much less make it go away. The market price is our salvation from the despotism of those who would rule us. The price of gas is a lovely example. And who benefits in the end? You and I. All the activities of the market are ultimately directed toward pleasing the consumers, the 99 percent who are the real rulers of the world. The 1 percent have no power in the face of global forces of competition, supply, and demand. Take comfort from the gasoline price. It indicates that the powerful aren’t really what they believe they are. In the long run, decentralized markets always outpace and outwit the ability of elites to dictate and manipulate them. Every penny by which the price drops signals to the world: freedom can prevail even in a world in which the powerful are conspiring to destroy it.

Bottom Line: With the price of gasoline at its lowest level ever when adjusted for fuel economy and measured in “time cost,” it’s a great time to celebrate the “marvel and power of the market and market prices” and Jeff Tucker does that exceptionally well in his article. Resource economist Julian Simon must be smiling right now because he predicted throughout his noteworthy career that the prices of commodities and resources would generally trend downward in the long run due to market forces, innovation, and technology. Today’s low gas and oil prices are an appropriate tribute to Julian Simon, and a compelling confirmation of his many decades of work and writing on resource economics.