Tuesday, August 23, 2005

Singing for my gas tank 

I'm getting ready to write my part of the next Quarterly Business Report, and I was thinking about gas prices -- of course. I read William Polley's description of John Tierney's Simonesque bet, and I wondered what the price of oil is like when the numeraire good is labor rather than prices (remembering again Craig Depken's complaint about using real prices.) Here's what I got. The more surprising part of the story to me was the lefthand side of the graph rather than the right. That mid-1960s period is thought of as one for big cars, lots of energy consumption, cheap gas from Saudi Arabia, etc. Guess not.

The numerator comes from the Energy Information Agency, switching from leaded to unleaded gas at the last moment (when EIA doesn't report leaded any more.) The denominator is average hourly earnings of private production workers; it's the broadest measure. I didn't want an argument over using a generous numeraire by using compensation per hour, which includes nonwage benefits like health. I think the latter measure would make the story more favorable to saying energy prices aren't that high.

That's not to say people aren't spending more on gas. But this may be an increased demand for vacations along with the increased hassle of using airplanes, or it may be that families are demanding larger, heavier cars. But there's little doubt in my mind that it's foolish for us to continue to believe that current prices are an aberration.

And if you want to keep energy coming, you should like these prices. (h/t: Don Boudreaux.)

UPDATE: But you shouldn't do this. Courtesy Mises blog, where Pierre Lemieux has some similar thoughts.