Saturday, November 15, 2008

Did the +26% Increase in Gas Prices During the 1930s Contribute to the Great Depression?

Here's maybe another reason (see previous post here) why we shouldn't be making comparisons of today's economic conditions to the Great Depression. The real price of gas increased by 26% between 1931 and 1934, which certainly didn't help an already weak and struggling economy.

Although gasoline was less important to consumers of the 1930s than consumers today, the economy of the 1930s was also much less energy efficient than today, and the energy consumption per real dollar of GDP was probably at least 2.25 times higher than today (see data here back to 1949). For example, in 1949 it took 19,570 Btus of energy per real dollar of GDP compared to 8,780 Btus in 2007. The energy data don't go back to the 1930s, but it would be safe to assume that the economy of the 1930s was probably much less energy efficient than in 1949, and therefore more vulnerable to a supply shock of a 26% increase in real gas prices. After all, consider that the "oil shock" and +22% increase in real gas prices between 1973-1975 contributed to a 16-month recession, the longest recession since WWII (tied with the 1981-1982 recession).

In contrast, the 50% decrease in gas prices during the last four months, from $4.12 in July to $2.12 currently, is the equivalent to a $284 billion tax stimulus for today's economy, in terms of the annual savings for U.S. consumers and businesses from a $2 drop in retail gas prices ($1 decrease in gas prices = $142 billion in annual savings). As I mentioned before, we're not even yet close to the recessionary conditions of the 1970s, 1980s, or early 1990s, so the comparisons to the 1930s and the Great Depression are fantastic, alarming and inaccurate. The fact that the economy of the 1930s suffered from an energy shock equivalent to the oil shock of 1973-1975 is one more reason we shouldn't be comparing today's economy to the 1930s, in my opinion.

3 Comments:

At 11/15/2008 1:25 PM, Blogger spencer said...

By using 1931 rather than 1929 you are really changing the history.

Prices fell sharply in 1930-31.

Here is the same data set equal to
1929=100.


1929...100.00
1930....95.55
1931....89.18
1932...104.99
1933...109.99
1934...112.58
1935...109.78
1936...112.24
1937...111.34
1938...110.72
1939...107.94
1940...104.97

Clearly tells a very different story, doesn't it.

 
At 11/15/2008 8:04 PM, Anonymous Anonymous said...

Prices fell sharply in 1930-31.

The Texas Railroad Commission had just embarked on its OPEC-style production cuts shortly after the East Texas Field came on stream. The Texas Rangers (no, not the baseball team) enforced the production cuts.

 
At 11/22/2008 8:39 AM, Anonymous Bon said...

Another story can be told if you look at the retail price of a gallon of gasoline during the same time period. It's also important to see the prices just prior to and after that period in order to see the trend showing that the lowest prices at the pump were realized in the 1930s.

1920...30 cents
1921...26
1922...25
1923...22
1924...21
1925...22
1926...23
1927...21
1928...21

1929...21 cents
1930...20
1931...17
1932...18
1933...18
1934...19
1935...19
1936...19
1937...20
1938...20
1939...19
1940...18

1941...19 cents
1942...20
1943...21
1944...21
1945...21
1946...21
1947...23
1948...26
1949...27
1950...27

Steady, but minimal, increases continued to 1974 when we began seeing larger jumps in gas prices.

1973...39 cents
1974...52
1975...57
1976...61
1977...66
1978...67
1979...90
1980...$1.25

Nothing, however, comes close in comparison with the price increases of 2008.

 

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