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January 10, 2008

Why haven't gas prices crippled us?

Gas prices are up almost 200 percent this decade. Today, gas costs nearly $3 a gallon, but 10 years ago, gas cost only $1 a gallon, and in the early '70s, it was 50 cents a gallon. You'd think this would put our economy into a recession if not depression, but many economists say, "no." Why? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think there are three reasons. First of all, with any price - gas, the price of bread, the price of eggs, it doesn't matter - when you're comparing that price over time, you need to adjust for general inflation. Economists call that converting from nominal dollars to real dollars. When you do that for gasoline, yes, gas prices have certainly gone up in the last 10 years, but they are about at the same level in inflation-adjusted terms today as they were in the early 1980s, so - bottom line - gas prices have not gone up as much when you take into account general inflation.

"The second major reason is efficiency. I think this has really been a fact that people have not seen really emphasized enough, and that is that our economy has become a much more efficient user of energy. In fact, our overall efficiency rating has improved 50 percent since 1970, so when the price of energy like gasoline goes up, yes, that does affect us, but it doesn't affect us as much because we're spreading that cost over more income than in the past.

"And then thirdly - and this is a compilation of the first two things - is that if you take a simple measure: how much of total spending, particularly by consumers in the economy, is taken up by expenditures on gas and oil and how that has changed, today that number comes to 3.5 percent - 3.5 percent of all consumer spending is on gasoline and oil. It's higher than it has been in the recent past, but in 1990, it actually stood at 3 percent. So, yes, things have gotten more expensive energy-wise, but in terms of the take from our total spending perhaps not as much as many people think."

Posted by Dave at January 10, 2008 08:00 AM