Tuesday, April 22, 2008

The price of gasoline is consistent with current inflation

Economics 101: The Price of Gas

Adjusted for inflation and tax, gasoline prices should actually be higher than they are today. "First, we need to take into account inflation. The result of the Federal Reserve printing too much money is a loss of purchasing power of the dollar: something that cost $1.00 in 1950 would cost about $8.78 today. As for gas prices, in 1950 the price of gas was approximately 30 cents per gallon. Adjusted for inflation, a gallon of gas today should cost right at $2.64, assuming taxes are the same." But taxes have risen considerably, meaning that, adjusted for inflation (inflated money supply) gas is cheaper now than it was in the 1950's.

Posted by planning4acrash @ 10:21 PM (832 views)
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13 thoughts on “The price of gasoline is consistent with current inflation

  • Worked something like this out myself today, 1 -litre petrol was 83p in april 2003 and is now 108p which is 5.5% per annum over 5 years including tax increases!

    Strange but true, and prices should be higher than they are, but they are not?

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  • planning4acrash says:

    This is the argument I’ve been putting forward all day. Prices are going down infact, in real terms, because the Saudi’s are right, that demand is dropping and supply has been ramped up way too high. That’s why OPEC have been cautious with quota’s. It won’t stop the USA invading Iran, supposedly to protect the US right to drive.

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  • enuii…. First of all, I disagree with your figures. According to the AA the price of diesel has gone from 81p to 117.4p in the last five years [1]. That’s a rise of 44% in five years, or 7.6% per annum compounded. Fuel duty increases have been negligible over that period – the infamous fuel duty escalator ended in late 2000. The total tax take increased mainly because rising fuel prices incurred higher VAT.

    Secondly, the price of crude oil has risen from $25 in April 2003 [2] to $115 today [3]. That’s a massive 360% increase in the dollar price! Even when measured in pounds, it has risen from £15.88 to £57.69 per barrel, a 263% increase (29% per annum). High levels of fuel duty have shielded us from the volatility of the oil price.

    So the price of oil has not being going down, even when adjusted for inflation. For the mega-bear point of view, point your blog-browsers to The Oil Drum.

    [1] http://www.theaa.com/motoring_advice/fuel/index.html
    [2] http://tonto.eia.doe.gov/dnav/pet/hist/rbrteM.htm
    [3] http://www.guardian.co.uk/feedarticle?id=7479055

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  • planning4acrash says:

    Drewster. You assume that inflation is measured accurately by CPI figures. Compare fuel price inflation with money supply growth and you get a better correlation. Admittedly, money supply hasn’t risen quite as fast as oil prices, but money has gone there disproportionately because a bubble is forming. I wrote in an earlier post that oil shortage propaganda, correct or not, is driving speculation towards oil because it is a sure bet, but the price rises are amplified by shortages because price rises could not be sustained without accompanying monetary expansion.

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  • planning4acrash says:



    UK figures

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  • planning4acrash says:

    oops!

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  • planning4acrash says:

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  • planning4acrash says:

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  • planning4acrash says:

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  • planning4acrash says:

    Oops, so much to think about, I was wrong in post 4. Indeed, oil prices have risen more slowly than M3 growth so could jump higher before in true bubble territory.

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  • p4ac, excellent point. It’s shocking to realise just how great M3 growth has been! But where does that leave s2r1 and his gold/oil ratio? That shows either gold being far too cheap or oil being too expensive (or the ratio being meaningless).

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  • also sold to rent says:

    I always seem to miss these oil related topics. Oh well. My two pence worth is that “price rises could not be sustained without accompanying monetary expansion” depends on what you mean by sustained. If there are supply constraints for oil then prices rise (possibly a long way) as demand isn’t very elastic. Even with NO monetary expansion you would just get deflation in other areas (flat screen TVs etc) as nobody could afford them because of the cost of food, heating, petrol, etc. So you could have a quite lengthy period of inflation in oil and other ‘must have’ commodities that are affected by oil (food etc) without increased money supply. That’s exactly where we are headed now and into the next decade.

    Best make sure you’re invested in ‘must have’ commodities I say. Energy funds up about 10% so far this year, the FTSE 100 down 6.7%. High oil prices either hurt you or help you. It’s your choice.

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  • planning4acrash says:

    General prices can rise without monetary expansion for a short while, whilst the velocity of money increases, i.e. people converting more cash into goods, in the expectation of rising prices. However, if monetary expansion does not occur, the velocity of money will decrease and undershoot, taking general prices back down.

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