Discussion

By Kurt M. Sanger on Apr 25, 2011

I have no problem applying inflation rates to a gallon of gas to compare historical prices. Attributing efficiency increases to oil prices are a stretch. It doesn’t take into account the use of cheap labor. It attributes all of the efficiency gains to oil which is not the case. All production improvements are not improvements in oil efficiency. Some of them are product innovations, manufacturing innovations, new products that don’t use oil at all, and obsolescence of old products that are no longer needed. Justifying the increase in price by attributing all efficiency improvements to oil so we feel better about giving some thug an inflated price is a bad thing to do.

By Edward Daniel on Apr 25, 2011

Regading the price of gas, no inflation adjustment needs to be made to today's price of gas as the current cost of oil is about 3 times the 1980 cost of oil and the cost of gas ($3.90) is a little more than three times the 1980 $1.25/gallon cost for gasoine. So adjusting for effeciency only, the 1980 gallon of gas would be $7.17 today, not $19.78.

By Josh Barnhart on Apr 25, 2011

Great article on energy.
For your efficiency factor, don't you also need to use inflation adjusted GDP?

By Joe Webb on Apr 25, 2011

Catching up on a couple comments that were raised.

First, cheap labor would have increased the percentage of energy as a percentage of GDP.
A rough example would be if GDP was 100, labor was 80 and energy was 20, but then labor became cheaper so that GDP was 95, labor was 75 and energy was 20, the percentage that energy was of GDP would be higher. Production improvements are from technology and better management, not always in oil efficiency, of course. While it is possible to create petroleum products that burn better, efficiency in all commodities is ultimately the result of wiser use. I miss my 1978 Ford Granada and its 13-14 miles a gallon, but it's solely a sentimental thing since it was the first car I ever owned. Cars are much better now in almost every aspect. Lighter weight materials increased their mileage, but even the production of lighter weight materials are produced with greater energy efficiency.

Second, of course gas was cheaper then. But the issue is what the inflation adjusted price of today's price level would have been. You are correct that today's price is not far from the actual adjusted market price at that time. Adjusting for productivity alone also shows, in striking fashion, that $4 gas today is not the danger that experts claim, as annoying as paying $4 might and should be. Efficiency is the primary reason why energy is only about half the share of GDP it was back then.

Third, "real GDP" is inflation-adjusted GDP.

Glad I got everyone chatting about this. The $19.78 price is rather unbelievable, and not really useful other than for starting a discussion. All prices have consequences in the way they affect the purchase and use of other goods, and the $19.78 price is an example of how dangerous Microsoft Excel can be :)

By Edward Daniel on Apr 25, 2011

" prices have consequences in the way they affect the purchase and use of other goods" . . . which takes me back to my school days with discussions of marginal propensity to consume and output multipliers and tax policy . . . my head is starting to hurt :-(

By Joe Webb on Apr 28, 2011

Yours? Mine too... and then the voices start...

Today (4/28) we get the advance GDP for Q1-2011 and then next week is packed with data. You think your head hurts now...