Different Situation, But Prices Are Not Unprecedented

In a previous column, I pointed out that — perhaps surprisingly — the price we’ve been paying for gas lately, compared to 90 years ago, is not as high as people would think — that is, once the rate of inflation is factored in to the equation. For instance, while motorists may have been paying only $0.25/gallon in 1919, when converting that number to February 2012 dollars, the cost was $3.35/gallon — a mere 6.5 percent cheaper than 2011′s annual average of $3.57/gallon. The chart below shows the price movement (based on February 2012 dollars) from 1919-2011.

Annual gas prices adjusted for inflation 1919-2011. Cost in Feb. 2012 U.S. Dollars.

From the Eve of the New Millennium

However, while it’s true that gas prices today are similar to where they were 90 years ago, if you take a closer look at the above chart you’ll notice that from the 1920′s through the end of the 20th century (except for occasional bumps mostly due to world events) prices were steadily declining. Yet as the 20th century turned into the 21st century, gas prices began to spike at an incredible rate — and this time factoring in the rate of inflation did nothing to smooth out the numbers like they did when comparing the $0.25/gallon in 1919 to the $3.57/gallon in 2011.

The purpose of this exercise is to present the data so people can see where the price spikes occurred just as the earlier data was presented for people to see where it didn’t occur. In order for the data to be as accurate as possible, I’m once again going to use the Consumer Price Index (CPI) from the U.S. Bureau of Labor Statistics to calculate the rate of inflation (some say the CPI is not always the best measure of inflation, but it’s what the U.S. Department of Energy uses).

Average annual gas prices from 1998-2011.

Average cost for a gallon of gas in the U.S. between 1998-2011:

CLINTON YEARS

1998 — $1.03

1999 — $1.14

2000 — $1.49

BUSH YEARS

2001 — $1.43

2002 — $1.34

2003 — $1.56

2004 — $1.85

2005 — $2.27

2006 — $2.58

2007 — $2.81

2008 — $3.26

OBAMA YEARS

2009 — $2.35

2010 — $2.78

2011 — $3.53

Average annual gas prices climbed from a low of $1.03 in 1998 all the way to $3.53 in 2011 — an astronomical 243 percent rise in under 15 years. By contrast, during this same time period, the Consumer Price Index gained only 38 percent.

Percent Change & Inflation

Gas prices and Consumer Price Index percent change from 1998.

As plotted on the graph above, the rise in gas prices were operating on a completely different plain from the CPI. By 2005, gas prices had jumped 120 percent in the seven years from 1998, while the CPI had climbed just 20 percent. By 2008, gas prices continued to skyrocket, up 217 percent from 1998, while the CPI was up by only 32 percent.

Gas prices and CPI percent change compared to the prior year, from 1999-2011.

Looking at the yearly changes in both CPI and gas prices in the chart above, one can see the contrast of the CPI’s steadiness and the volatility in gas prices. Only one time in the 13 years did gas prices move by less than 5 percent, as opposed to the CPI which never had an even 4 percent change in any of the years.

Conclusion: Chance For a Bumpier Ride Ahead?

The analysis shows that while the current high gas price levels are not unprecedented, there are some signs that we could be shortly headed into unprecedented territory. We have made some runs at that in the past decade, and it may not be long before we have truly entered a new paradigm.