Daily Archives: May 1, 2008

The End of an Era

With the exception of a seven-year period beginning in 1979, the inflation-adjusted price of a gallon of gas was never higher than $1.60 from 1950 to 2003. As recently as 1998, a gallon of gas cost $1.10, the lowest inflation adjusted price recorded at least since World War II, perhaps ever. In 2004, gas went to $1.94 a gallon, then to $2.34, $2.65, and $2.79, in successive years. This year’s average price will certainly end over $3.00, marking a near doubling in five years and a nearly 300% increase in ten years.

With gas prices averaging a bit less than $1.50 during most of the “automobile era,” a family of four consuming 2,000 gallons of gas would spend $3,000 a year. This means that for much of the automobile era, gas prices have pretty much represented a fixed cost of approximately 7% of average family income. Consumers could happily motor certain in the knowledge that the cost of gas would be mostly incidental to the cost of driving and the cost of living.

Under these circumstances, people made certain decisions – such as the type of car to drive, how far to live from work, where and how often to go shopping, how many cars to own, and whether or not to use public transportation – based on certain expectations about the cost of gas, expectations that have been reasonable throughout much of the automobile era.

Likewise for businesses. The proximity of businesses to employees and customers and to public transportation lines is shaped by fuel costs. So are decisions about how and how far to ship goods. So, I would submit, are decisions about the scale or size of the business.

And these are just direct, at the pump fuel costs. Since energy is involved in almost everything we do, increased energy costs are a major source of inflation, showing up in increased shipping, heating, and cooling costs. In our petrochemical economy, oil also represents a major input in paints, plastics, food, and fertilizers.

My point is that our landscape of lawned suburbs, retail sprawl, and campus-like office complexes connected by a dense thicket of roads is the product of an era of cheap fuel, an era that has just ended. With oil production declining in Mexico, the North Sea, Russia, and Norway, with demand growing far faster than supply, and with even Saudi Arabia showing signs of fatigue, there is little evidence to support the hope that recent price increases are temporary.

In its last phase, fueled by well below average gas prices and well below average interest rates from the mid-1990s to 2003, we experienced a historic surge in residential and commercial sprawl. Retail square footage per capita more than doubled in what was already the world’s leader in retail space. Wal-Mart became the world’s largest company. Lowe’s quadrupled its number of stores. Now we are left with a huge hangover and a doozie of a recession to get over it.

Returning to our average family of four, fuel costs are now approximately $7,000 a year, or 16% of income. That’s equivalent to $585 a month, comparable to the mortgage on a modest home. This doesn’t include the inflationary effects of higher fuel prices on food, heating, cooling, and everything else. Using the methods used to measure inflation back in the 1970s, before the federal government changed the formula to show less inflation, today’s inflation rate is almost 12%. (See article here for details).

It will take a while for the new reality of gas prices to be felt. Many households and businesses will carry out plans made in a previous era, believing that era isn’t really over. Schemes to suspend gas taxes, send checks to taxpayers, and draw fuel from the Strategic Petroleum Reserve will be tried.

In the end, though, we will need to accommodate to an era of permanently higher fuel costs. Even as a dedicated opponent of sprawl, I enter this new era with real concern.