Tuesday, July 21, 2015

July's Economic Outlook from Dr. Kamran Afshar, Chamber Chief Economist

By Dr. Kamran Afshar, Chamber Chief Economist
The Chamber’s Finance Committee

 What happened to the 25¢ a gallon gasoline?

Oil prices dropped rapidly during the 2nd half of last year through January of this year. Falling from more than $107 a barrel in June 2014 to $46 in January 2015. A whopping drop of 56% in 31 weeks. During that period gasoline prices dropped by 45%, this is an exceptionally large decline generally the drop in gasoline prices is close to half the drop in oil prices. However, gasoline prices have already risen by 34% since their January lows and appear to be continuing to rise.

The reason for the collapse of oil prices last year was the oil glut on the international market. The U.S. is producing more oil at home while the other major producers have not attempted to curb their production; nobody wants to lose any market share.

While it may make us feel good that gasoline prices have dropped, we shouldn’t get too comfortable with it. Many of us remember that this is not the first time we’ve seen a huge drop in oil prices to be followed with prices going back up again.

In 2012, oil prices dropped by 25% inside of 4 months, with a subsequent 15% drop in gasoline prices. A time prior to that was in 2011 when oil prices dropped by more than 27% in a 6 month period. This was accompanied by only a 14% drop in gasoline prices. However, the longest period of decline in oil prices since the 1970s, happened during the 1997-99 period when oil prices dropped by a whopping 57% during a long 100 week period, with an accompanying 27% drop in gasoline prices.

Oil prices have been rising since January, however, and as of this writing, oil prices are still 45% below their June 2014 level. Gasoline prices are now 26% below last June’s level.

An old friend of mine, well, older than me, asked what happened to the 25¢ a gallon gasoline. I checked the numbers and discovered that in the first place my friend is a lot older than I thought; that is because the last time gasoline prices were that low was in 1949. And gasoline prices held below 50¢ a gallon all the way to 1973. From then on prices started to go up rapidly. These numbers however, are grossly misleading, back then the price of everything was lower, so were wages and salaries.  On average, prices have risen 10 fold since 1949. And when adjusted for inflation gasoline prices were $2.66 a gallon in 1949 in today’s dollars.

A more interesting find in the review of gasoline prices over the last 65 years was that gasoline prices, in today’s dollars, have oscillated between 2 to 3 dollars a gallon for most of this period. The average inflation adjusted price of gasoline for the last 65 years was $2.47 a gallon. Contrary to appearances, gasoline prices, after adjustment for inflation have been very stable over the last 65 years. And when adjusting gasoline prices for inflation, the average per gallon price of gasoline for the first 5 months of 2015 drops to 23¢ in 1949!    

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