Just How High Are Gas Prices? (James B. Bell Commentary)

Now that gasoline prices have moved above $2 per gallon, it seems like they have joined sports and weather as a staple of daily conversation.

People have cancelled vacations and started carefully planning errand trips. Companies that can pass the costs on are doing so, and those that can’t are seeing their margins squeezed.

No dinner party is complete without a horror story about a $50 stop at the Texaco. But just how expensive is gas really? Has its price risen faster than other important commodities? Is it expensive on a historical basis? And what are the components of gas prices?

Perhaps because gas is purchased so frequently, and the price is stated so obviously, price increases leave a more lasting impression than from other goods and services. But the fact is, although gasoline prices have increased a great deal, they have not kept pace with rent, postage, meat, medical costs, college tuition or even the overall rate of inflation.

So gas prices have not increased as much as many other costs, but they are still at an all time high, right? Yes and no. With the recent spike, the price paid at the pump (nominal price) was indeed the highest in history. But adjusted for inflation, the “real” price of gas has been above $2 for much of the past 90 years. Put another way, a gallon of gas may have cost only 30 cents in 1956, but 30 cents went a lot further then than it does today. For the past 20 years, however, the real price of gas has hovered around $1.50, making the recent spike painful indeed.

Who benefits from the price of gas? How does that $2.079 per gallon get split up, and who do they think they’re fooling with that extra nine-tenths of a cent tacked on there? According to the Energy Information Administration, of the retail price of gasoline, 54 percent is attributable to the price of crude oil input, 21 percent goes to federal and state taxes, 19 percent goes to the cost and profit of refining the crude, and only 6 percent to the costs and profits of the distributor and retailer. So the bulk of the price of gas goes to the oil producing countries, the integrated oil companies, and the government, with only a small slice left for the tanker trucks and local station owners.

Keep in mind that profits don’t necessarily rise with rising gas prices. Often input costs at each level of production rise as well, keeping profits in check. Because of a lack of alternatives, commuting to work, shipping cargo and restocking shelves all use a given level of gasoline and other petroleum fuels to keep the economy running.

For this reason, increases in the price of gas are often viewed as a tax on the American consumer. Whatever “extra” is spent on filling up the tank or higher prices at the grocery store is income that consumers would otherwise save or spend on other items.

Since consumer spending is such a large component of our economy, it is clear that high gas prices can be a drag on economic growth.

(James B. Bell, CFA, is vice president and assistant portfolio manager at Garner Asset Management Co. (a subsidiary of Garrison Financial Corp.), a registered investment advisor in Fayetteville providing investment counseling and wealth management services to individuals, retirement plans and institutions.)