Comfortably Numb - A Reality Check on Energy Prices and Their Impacts

WTI is selling for north of $120 a barrel, gasoline and diesel are retailing for more than $4.10 and $4.80 a gallon, respectively, and, with Russia continuing its unprovoked war against Ukraine, it’s hard to imagine prices for hydrocarbons easing by much anytime soon. As startling as the recent spikes in crude oil and refined products prices may be, however, it’s worth keeping in mind that, in real-dollar terms, prices for these commodities have been considerably higher in the past, including through much of the 2006-14 period and back in 1979-81. And don’t forget, the car, SUV, or pickup you’re driving today consumes about two-thirds as much fuel per mile, on average, as the vehicle you (or your parents) drove back when Ronald Reagan was running for president and Pink Floyd’s The Wall was the best-selling album. In today’s RBN blog, we put today’s “record-breaking” prices for crude oil and motor fuels in perspective.

There’s no denying that rising energy prices have a disproportionate impact on poor and working-class Americans, many of whom are holding down two or more jobs and struggling to keep their financial heads above water in an economy experiencing its worst price inflation in decades. For the rest of us, though, as frustrating as it may be to see the cost of filling up our tanks soar past $40, $60 and even $80, the prices we’re paying at the pump are, in real terms, considerably lower than previous peaks. Further, even with the trend toward larger, more powerful vehicles, the cars, SUVs and pickups we drive are much more energy efficient than they were in past decades. The bottom line is that while Americans are spending a greater share of their income on energy than they were a few months ago, that share is still lower than it has been in the past.

The numbers don’t lie. First, we’ll look at WTI crude oil prices. Figure 1 shows both nominal prices for WTI (the monthly average prices as they were recorded at the time; blue line) and prices in current, inflation-adjusted 2022 dollars (orange line). (As you would expect, the gap between nominal and current-dollar prices narrows over time.) While the WTI price rise has been nearly parabolic in recent weeks and averaged about $111/bbl the first week of March (dashed red oval), in real dollars, the current price of WTI is still lower than 40-plus months in the 2007-14 period, when the 2000s commodity boom caused crude prices to soar. The boom culminated in June 2008, after a sharp run-up, peaking at ~$173 (dashed gold circle) in current dollars, when the nominal price of WTI was ~$134. That runup was then punctuated by the sub-prime mortgage crisis and onset of the Great Recession. WTI was also higher in real-dollar terms every month between November 1979 and May 1981 (dashed green oval), when the current-dollar price of WTI peaked at about $137/bbl and the nominal price ranged from $31 to just shy of $40/bbl. That period, known as the 1979 Oil Shock, was caused by a series of unfortunate events in the Middle East.