Friday, December 07, 2007

Why The Goldilocks Economy Can Handle $3 Gas II

In a previous CD post, I wrote about the relative affordability of today's $3 gasoline, measured as share of disposable income. After the Federal Reserve released data today on third quarter household net worth ($528,000 per household), I thought it would be interesting to look at the cost of gasoline as share of per-capita household net worth.

Using data on household net worth from the Federal Reserve, historical gasoline price data from the EIA, and population data from Economagic, the graph above show the historical series of 1,000 gallons of gasoline purchased at the average retail price in a given year, as a share of per-capita "household new worth" in that year.

In 1949, the retail price of gas was only 27 cents, but it took 4.2% of per-capita new worth to purchase 1,000 gallons of gas, making gasoline almost three times as expensive then compared to today, when it only takes 1.44% of per-capita net worth to buy 1,000 gallons of gas at $3.

To be as expensive as gas in 1981, measured as the cost per 1,000 gallons as a share of per-capita net worth, gasoline today would have to sell for about $6.50 per gallon.

Bottom Line: Gas today, even at $3, is relatively affordable and is actually cheaper than the decades of the 1940s, 1950s, 1960, 1970s and 1980s, when the price of gas is measured relative to our increasing household wealth. Goldilocks can handle $3 gas.

15 Comments:

At 12/07/2007 1:26 AM, Blogger Graduate said...

Wow! I just discovered your blog today (thanks to Mike Moffat at About.com: http://economics.about.com/od/interestingandfunny/tp/economics_blogs.htm?nl=1) and I think that I've already learned more relevant information about the economy than in four years of economics classes. Great job at making the statistics interesting and accessible! I already like stats, but it's nice having them interpreted for me. :-)

 
At 12/07/2007 2:19 AM, Anonymous Anonymous said...

The value of my old car changes significantly depnding on how much gas is in the tank.

 
At 12/07/2007 12:29 PM, Anonymous Anonymous said...

The dates in your graph's title are wrong.

 
At 12/07/2007 1:04 PM, Anonymous theo said...

I imagine the graph would look even better if it were normalized for average fuel efficiency.

 
At 12/07/2007 1:54 PM, Anonymous solzy said...

but to what extent is per household net worth skewed? i think it might be telling if we compare the ratio of the cost of 1,000 gallons of gasoline to both the mean and median per household net worth. i could be wrong, but i bet the statistics are skewed toward high net worth households.

 
At 12/07/2007 4:39 PM, Blogger Mark Richardson said...

Why use net worth to discuss the affordability of petrol? Isn't it more pertinent to look at disposable income?

 
At 12/07/2007 5:10 PM, Anonymous Anonymous said...

Mark Richardson looking at disposable income would be a better step but still incomplete because it wouldn't take into account increased or decreased expenses in other areas.

Stating that because gas was more expensive in 1949 than it is today and that is why the economy can handle $3 gas is just plain dangerous.

 
At 12/07/2007 5:12 PM, Anonymous Anonymous said...

When was the last time anyone reading this used "net worth" to pay for gasoline?

 
At 12/07/2007 9:35 PM, Anonymous Anonymous said...

What this does not take into account is how much fuel economy is wasted because of longer commuting, how much 'disposable' income goes toward health care/housing and education costs compared to those earlier eras. Just because my net worth is high due to my questionable real estate holdings, does not mean my 30 mile commute in a SUV does not hurt my ability to spend on other things.

You would also think a Flint-area economist would understand fuel economy and its 20 year decline.

 
At 12/07/2007 11:09 PM, Anonymous Anonymous said...

Today, there are 2-3 cars per household in the average suburban neighbourhood and many people buy new rather than used cars. In 1950, only the very well off could afford to buy a new car and many families did not have a car.

Much as we like to carp, the standard of living in the US has improved substantially over the last 50 years.

 
At 12/11/2007 10:38 AM, Anonymous Anonymous said...

Am I missing something here. Household net worth of $528,000? I looked on the Fed. reserve site and it lists $58,604 as of 3 rd quater 2007. I guess its a typo.

 
At 12/11/2007 10:54 AM, Blogger Mark J. Perry said...

It's $58 trillion of total household net worth, and there are about 110 million households, so it is about $528,000 of net worth PER HOUSEHOLD.

 
At 12/15/2007 3:15 AM, Anonymous I like graphs said...

With a skewed income and wealth distribution, the relevant comparison is not with the average net worth per household, but rather the median net worth per household. I am pretty sure you will get a different dynamic result if you are able to make that adjustment.
If everything is in real terms even better.

 
At 12/29/2007 1:39 AM, Blogger Seo Link Master said...

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At 9/07/2008 12:49 PM, Anonymous Tim said...

good Job!: )

 

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