Well, it looks like the high gasoline prices are not upsetting consumers all that much.
Consumers shrugged off higher gasoline prices in April and sent a widely watched barometer of consumer confidence to its highest level in almost four years, a private research group said Tuesday.
Why? Probably because we have seen prices go even higher in the past and our economy is more fuel efficient now. In short, oil prices would have to go higher than they did in 1980 to have a similar impact. Back in 1980, when gasoline prices were $38/barrel, the equivalent price would be a little over $92/barrel. While our consumption of oil gasoline has gone up by about 28% since 1981 (using 2005 as the final full year for comparison), the U.S. GDP has more than doubled over the same time period. The implication is that we use less oil than we did before per dollar of GDP.
Still, this doesn’t mean that gasoline prices are irrelevant. After all, a price increase in any good entails both an income effect (part of the price increase has a similar effect to lowering income) as well as a substitution effect. Too bad Lou Dobbs just doesn’t seem to understand any of this though.
Update (4/26/2006): I edited the part about consumption of oil to gasoline and changed the final sentence to include the “per dollar of GDP” portion. That is our economy is more fuel efficient.
I also looked at crude oil data from 1991 and 2005 and there is a similar relationship between oil and GDP as well. Oil consumption went up 27%, but GDP increased by 57%. That is we use less oil per dollar of GDP now than we did in 1991.
