Record Fuel Prices Rekindle Old Memories

After a few months of debate over whether gas prices this summer would reach record levels, the data is starting to come in, and it looks like the news is not great.

According to the American Automobile Association's records, the current average price of gasoline in the United States is now over four dollars a gallon. Previously the highest ever paid in America for gas, at least in the modern era of automobiles, was in March 1981 when the price hit about $3.17 a gallon in inflation adjusted dollars. That was, arguably, a price spike, as is the current situation, but current prices are now quite a bit higher than the average annual price in 1980, and this is projected to go higher.

The new poll from Associated Press and Yahoo underscores this even further. In that poll, nine out of ten Americans anticipate the high cost of gas to negatively impact their budget within the next six months. So whether from the point of view of the data or the consumer sentiment, the pain at the pump is at an historic high, and we find ourselves in uncharted waters.

So, given all of this, why is the current fuel shock being experienced in such a different way this time around? When I was a child, I remember my Dad and me taking part of our Saturday afternoon to sit in the line at the gas station and wait for fuel. In 2008, there is nary a gas line to be seen. Part of this is explained by the supplies this time around. We are not seeing so much a problem with supply, as an unprecedented level of demand. In response to this demand, there is a lot of fuel being produced, but still demand continues to grow to outstrip it. And so, prices go up, but the gas keeps flowing. Shocks to the system such as problems in Nigeria create price spikes, and some stock volatility, but the world supply of oil is not all from one place, and so the system creaks and groans but keeps going.

Another key is the comparatively constructive role of OPEC in this. Although still a highly politicized group dominated by Arab States, OPEC does not behave as a monolith, is competing with other petropowers, and is also making no attempt to stifle the production of oil. If OPEC wished to be less constructive in the current situation, that would be indeed be volatile, but there remain some constraints. They also need to generate revenue and have nowhere near the monopoly they once had.

In addition, there is less government regulation this time around. In nations where there is government intervention in the fuel market, there has been a bit more distortion going on around the margins, notably in those places where fuel is subsidized such as in India. In America, however, there is now a broad consensus that price controls would not work, and it can be argued that the very price controls that were supposed to help the situation in the 1970s actually had the affect of making things worse, constraining supply further, and the result was a sort of rationing that resulted in queuing. Line ups for gas, in effect, were a direct result of government policy which has been abandoned.

Another thing I remember clearly from the 1970s is the incidence of people having their gas stolen. I tried to figure out the economic reason why I have heard of less theft of gas this time around, and then a few months ago a neighbor of mine had some gas siphoned from his car during the night. I realize that the reason for this was because he was driving an older model car, and it did not have a locking gas cap! Locking gas caps were of course introduced after the last gas crisis, and became a standard feature sometime in the mid 1990s. My own older model Ford had the same issue, so I quickly went online and ordered a locking gas cap for my own vehicle. No economic issue here - people would still steal gas at these prices, it's just gotten trickier.

I also remember that back in the day, people would drive around with a lot less gas in their cars, and from time to time you would encounter someone on the road who had run out of gas, and being neighborly my Dad would stop and then we would help siphon some gas from our car to theirs. I have no idea if this is entirely safe or not, and presumably a lot of the gas would evaporate in the transfer, but one thing I do remember is the taste of gasoline! Yes, I had a chance to learn how to do this as well, and of course the first time through, well, I got a mouth of gas!

So why don't people drive around with $5 of gas in their tank only to run out and need to flag down a stranger? I think the main reason for this must be the way we buy gas today. I checked around and all my friends and I all gas up using credit cards. Presumably, there are some fine folks that pay cash for gas, or alternatively use their debt card, but a big bunch of us charge it up. So, if spared the pain of coughing up an actual $40 in cold hard cash to fill up the SUV, perhaps there is less of a disincentive to fill the tank all the way any longer.

Finally, in speaking to friends who lived in California at the time, I asked about one other impact of the gas shock of the 1970s - the 55 mile an hour speed limit. People have explained to me with a sense of awe how on the day the law took affect, all the traffic slowed down and queued along at the new lower velocity. For the first couple of weeks, people diligently stuck to the speed limit, but it was strange and unnatural, and over time the regime collapsed of its own weight. Sammy Hagar's hard rock protest tune "I Can't Drive 55" notwithstanding, it appears that the measure was uniformly about as popular as the metric system, and it was scrapped.

So, this time around is different. We can drive faster, we lock our gas caps, and we are no longer in queues. Part of this is a result of changing markets, part of this due to changes in government regulation, and in the case of how we seem to be still buying a lot of gas despite the high price, some of this is hard to discern a reason for.

However, if all the discussion of electric cars and fuel efficiency continues, one icon of the fuel deprived 70's is bound to make a comeback: the sub compact car. Anyone interested in creating a revamped version of the AMC Gremlin?