Why $4-a-gallon gas is a bargain

By Slate.com

The next time you have to take out a loan just to fill up your tank, remember this: Four-dollar-per-gallon gasoline is cheap.

There's no doubt that high fuel prices are hurting low-income consumers, and high energy costs are placing a tax on the economy that is slowing investment while sending billions of dollars overseas. It's unsurprising that presidential candidates and members of Congress issue new proposals practically every day for lowering gas prices: Stop filling the Strategic Petroleum Reserve! Suspend the federal gas tax! Open ANWR to oil drilling!

• Talk back: Have you been hit with 'sticker shock' at the gas pump?

These proposals are delusions, and Americans are living in a fantasyland when it comes to energy and energy prices. Over the past few years, consumers have been inundated with news stories about the soaring price of gasoline. Invariably, these stories include comments from a motorist who is outraged at the evils of a) Saudi Arabia, b) OPEC, c) Big Oil, d) all of the above.

But by almost any measure, gasoline is still cheap. In fact, it has probably been far too cheap for far too long. The recent price increases are only beginning to reflect its real value.

Paying 1920s prices

When measured on an inflation-adjusted basis, the current price of gasoline is only slightly higher than it was in 1922. According to the Energy Information Administration, in 1922, a gallon of gasoline cost the current-day equivalent of $3.11. Today, according to the EIA, gasoline is selling for about $3.77 per gallon, only about 20% more than 86 years ago.

Given the ever-increasing global demand for oil products -- during the first quarter of this year, China's oil consumption jumped by 16.5% -- and the increasing costs associated with finding, producing and refining crude oil, it makes sense that today's motorists are paying more for their motor fuel than their grandparents and great-grandparents did.

Gasoline is also a fairly minor expense when you consider the overall cost of car ownership. In 1975, gasoline made up 33.4% of the total cost of owning and operating a car. By 2006, according to the Bureau of Transportation Statistics, gasoline costs had declined to just 17.1% of the total cost of car ownership. Of course, fuel costs have risen by about $1 per gallon since 2006, but even with those increases, fuel continues to be a relatively small part of the cost of car ownership.

By contrast, the fixed costs of ownership -- insurance, licensing, taxes and financing -- have increased nearly fivefold since 1975. Maintenance costs have also quintupled over the same time period. Given those increases and the relatively low price of fuel, it's not surprising that Americans are opting for big vehicles with powerful engines.

Considering the overall cost of owning a vehicle, fuel expenses just aren't a very big deal.

High prices, lower consumption

Significant declines in U.S. oil consumption have occurred only after prolonged periods of high prices. Over the last two decades, U.S. consumers have been spoiled by low fuel prices. And those lower prices led to a buying binge that put millions of giant SUVs, pickups and other gas guzzlers on our roads.

Today's higher prices are forcing consumers to adapt. The EIA now expects U.S. gasoline consumption to decline this year -- the first drop in demand in 17 years. In April, sales of small cars in the United States were up by 17% over the same period a year earlier, while sales of SUVs, trucks, and large cars all fell by about 30%.

Continued: Environmentalists should cheer

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