$3-a-Gallon Gasoline Isn’t as Painful as It Used to Be

(Bloomberg Opinion) -- Given oil's sharp drop, gasoline prices should soon fall somewhat. In any case, this most recent bout of pain at the pump was never really very painful to begin with.

Any price per gallon beginning with a “3” tends to provoke panic. But on a number of relative measures, recent gasoline prices don't look particularly high. In this chart they are adjusted for inflation, for example. Yes, they're a lot higher than last year. But that's no surprise. 

And gasoline's share of the American wallet is lower than it has been.

Another way of looking at this is to tweak the familiar metric of miles-per-hour to miles-per-hour-worked: How much driving distance does an average hour of labor buy at the prevailing pump price?

For October, I calculate an hour's work was enough to buy 7.3 gallons, on average. The latest data for the U.S. vehicle fleet's average fuel economy from the Bureau of Transportation Statistics are for 2019; I roll these forward through 2021. Meanwhile, the latest data on average fuel economy for new vehicles from the Environmental Protection Agency are for 2020, and I also roll these forward. Using these, we can get a crude measure of just how far the average worker can drive on an hour's labor, either in their trusty old workhorse or a brand new car. Again, recent history looks similar to the picture before the pandemic.

To make that slightly less abstract, consider the ubiquitous Toyota RAV4 Crossover SUV. The base 2021 model runs about $27,500 and is rated at just more than 31 miles to the gallon. Five years ago, the base 2016 model cost about $24,000 and scored about 26 miles to the gallon. So even though the sticker price was lower and gasoline was cheaper by about 25%, the combination of better mileage and higher wages mean a driver works fewer hours to cover the cost of buying and running a RAV4 today, on average, than back then.

Averages obscure harsher realities away from the mean, of course. And although the recent data don't look out of the ordinary in terms of their level, they were nearing more dangerous territory (as the charts show). At 59%, November's year-over-year price increase is the sharpest in monthly data going back to the early 1990s. Yes, that reflects the base effect of a year of lockdowns, but it's for a product of almost mystical importance to the U.S. consumer, who is reminded of its cost regularly.

The desire to blunt that momentum, and signal concern for those harsher realities, figured large in President Joe Biden's decision to release oil from the Strategic Petroleum Reserve. And he was surely mindful of the inverse relationship between gasoline prices and the prospects for his green-tinged budget package sitting in the Senate. Even though the numbers don't reveal an actual emergency, their speed and direction portended real trouble. 

I calculate this by adjusting average hourly wages from the Bureau of Labor Statistics for the all-in average personal tax rate for a one-earner married couple with no children, as calculated by the OECD. The latest data for the latter are from 2020, so I roll that figure forward for 2021, then divide the resulting net hourly wage by the average retail gasoline price as published by the Energy Information Administration.

This assumes 55% city driving and 45% highway driving.

Assuming annual driving of 13,000 miles, the 2016 model required1,254 hours of labor to cover its purchase and first year of fuel costs. The 2021 model requires less than 1,186. Go back a decade, and you needed 1,301 hours to buy and run the same (but far less efficient) SUV.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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