[Posted on behalf of Indur Goklany]
The price of gasoline is on everybody's mind these days, but affordability is just as important. To help put recent gasoline price hikes into perspective, some analysts and media outlets even provide us with information on the real price of gasoline, that is, price adjusted for inflation of the dollar. But even that provides, at best, an incomplete picture. A broader perspective is obtained by looking at trends in price relative to the personal income of the average American, as shown in the following figure. This figure plots the trend in the price of a gallon of regular gasoline in the U.S. from 1949 through the first quarter of 2006. This trend is displayed using three different measures: (a) nominal (or current) dollars, (b) real (i.e., inflation-adjusted) dollars, and (c) a ratio of the gasoline price to the per capita income. The last measure is an inverse proxy of the affordability of gasoline: inverse, because the lower this number, the more affordable the gasoline, and a proxy because it is an imperfect measure of affordability (more on this below). Each curve is normalized so that the price using any of the three measures is fixed at 65 cents per gallon (or $0.65 per gallon), which was the nominal price in 1978.

This figure shows that:
1. The nominal price of regular gasoline is higher now than at any time since 1949.
2. The "real" price during the first quarter of 2006 was at approximately the same level as it was in the early 1980s. Today (May 10, 2006), it is higher.
3. Relative to 1978, the price of regular gasoline has increased by 260 percent in nominal terms and 47 percent in real terms. However the price-to-income ratio has declined by 17 percent, i.e., it is more affordable today.

Moreover, what this figure does not show is that the absolute level of personal income per capita has gone up by a much greater amount than an average person's annual expenditure on gasoline. From 2003 to the first quarter of 2006, regular gasoline increased by 75 cents per gallon (in current/nominal dollars). This means an additional annual cost of less than $500 per capita, assuming that one drives 10,000 miles a year in a vehicle that gives, on average, 15 miles to the gallon. [The average miles per year is an overestimate, while the average gas mileage is an underestimate, hence the $500 is an overestimate by over 40 percent.] On the other hand over this period, average income per capita increased by $4,172 (also in current dollars). That is, 12 percent of the extra income went to feed one's vehicle, on average. But one's still better off to the tune of at least $3,672, even if one spent the entire increase, minus the extra cost of gasoline (and the inevitable taxes), on such pleasurable pursuits as blathering on the cell phone, buying an iPod, downloading iTunes, not to mention imbibing grandes at Starbucks and bottled water at prices vastly more inflated than those for gasoline.

Notes
1. The figure uses the price of regular leaded gasoline from 1949-1975, the arithmetical average of average of regular leaded and regular unleaded gasoline for 1976-1990, and regular unleaded for 1991-2006. For 2006, gasoline price and per capita income are based on the average of the first three months of that year. Gasoline price data are from the Department of Energy (DOE), Motor Gasoline Retail Prices, U.S. City Average, available at http://www.eia.doe.gov/emeu/mer/prices.html. Data on the implicit price deflator for 1949-2000 are also from DOE, and from the Bureau of Economic Affairs (BEA) for 2001-2006. The latter is available at http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp, Table 1.1.9. Data on per capita personal income are from BEA, available at http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp?Selected=N#S2, Table 7.1.
2. The average car, SUV, pickup or van is driven about 12,000 miles per year. There are 0.77 such vehicles per capita and they give between 17.7 and 22.3 miles per gallon. See Statistical Abstract of the United States, 2006.