The Real Story Behind Gas Prices

As recently as September 2001, the cost of a barrel of crude oil was $18.00, today the cost of a barrel hovers around the $62.00 mark, resulting in increased prices at the pump. However, the term "record highs" is based on a common economic fallacy -- a failure to adjust for inflation over time. General inflation raises the overall level of prices throughout the economy. The real issue is whether gasoline prices are rising relative to the other costs of goods and services. And if we measure energy and gas prices correctly, we find that gasoline, although the price has risen recently, is still affordable in historical terms. Adjusting for inflation we had higher retail gasoline prices as recently as 1985, and significantly higher prices from 1979 to the mid 1980s. Long term data on energy and gas prices tells us that gasoline prices paid at the pump have been on a steady rate of decline since the 1920s, with the obvious exception of the 1970s, when we faced an OPEC embargo and gasoline lines. In 1920 the real price of gas (excluding taxes) was twice as high as today. If the price of gasoline relative to wages were comparable today to what they were in 1920, we would be paying almost $10 a gallon for gas. American motorists should be pleased that the United States does not adopt the high-energy tax policies that are commonplace in Europe. European gasoline often exceeds $4 a gallon with more than half the price collected in taxes. That is one of the major reasons VPCGA successfully opposed legislation in the General Assembly that would have increased the state gas tax 76% from 17.5 to 30.6 cents per gallon, making Virginia's gasoline tax the highest in the nation.

Gasoline Prices Versus Other

Purchased Products

The following table illustrates how relatively inexpensive gasoline is compared to other products. It shows the price of gasoline per gallon compared to the price of a sample of other liquids products Virginia consumers buy on a regular basis. As of August 2005, the average price of gasoline in Virginia was $2.51 per gallon.