EDITOR’S NOTE: This piece appears in the May 9, 2005, issue of National Review.
Despite what you may have heard, oil and gasoline prices have yet to reach record levels–once we adjust for inflation. Even so, the gasoline price spike that began in the fall of 2002 is the second most dramatic in American economic history–steeper than those in 1973, 1990, and 2000, and nearly as great as that experienced between 1979 and 1981. A back-of-the-envelope calculation finds that the average household today spends between $63 and $79 a month more for gasoline than it did just three years ago.
#AD#Perhaps the absence of an identifiable villain has dampened political outrage. Oil companies are making record profits, but there’s no evidence that they’re holding anything back from the market. Likewise, neither terrorists nor Iraqi insurgents have had any significant impact on OPEC production. Global oil production was 66.8 million barrels a day in 2002, 69.2 million in 2003, 72.5 million in 2004, and is at record levels in 2005.
Regardless, gasoline prices aren’t particularly consequential in the grand scheme of things. Sure, we’re approaching the record prices paid for gasoline in 1981–about $2.42 a gallon in today’s dollars–but on average we’re a bit more than half again as wealthy today as we were then. If we consider gasoline prices in relation to per capita disposable income, they are only 58 percent of what they were in 1981, 44 percent of what they were in 1955, and about 90 percent of what they were in 1972. That probably explains why gas-guzzlers are still selling as well as ever and politicians are hearing little outrage from constituents.
What’s driving the oil market is demand–not primarily from American SUVs, mind you, but from the awakening economic giant that is China. U.S. consumption grew by about 700,000 barrels a day between 2002 and 2004, but Chinese consumption grew more than twice as fast: by 1.47 million barrels a day. But, even accounting for China, global oil consumption has increased by only 5.3 percent since 2002. How could that have resulted in a near doubling of world oil prices?…
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