Gas Price Graph from 1949 to 2007

Due to popular demand, I have created a new graph of real gasoline prices (adjusted for inflation) from 1949 to 2007 (using average annual data). That graph is located below:

As you can see, there is a gradual upward trend over the ~58 year period, with large price shocks around 1980 and 2005.  There are both short term and long term reasons for both shocks.  However, the upward trend that this graph’s trendline shows will begin to rise more rapidly for several long-term reasons.

First, the supply of petroleum is gradually decreasing, and when supply decreases, prices tend to rise.  Many oil experts have asserted that world oil production has passed Hubbert’s Peak, and the total supply of petroleum is in decline (Sources: 1 2 3 4).  Of course, this is up for debate, and many other experts claim that Hubbert’s Peak is faulty, and perhaps having multiple peaks, or is simply poorly derived (Source).  Regardless, there is a finite amount of petroleum on the planet, and as it becomes more scarce, total oil supply drops, because the “easy” sources of oil that were being used are gone, and now oil must be obtained through more difficult, and costly means (tar sands, etcetera).

Secondly, demand is increasing, and will continue to do so.  This is due to a number of factors, but most importantly, due to an increase in per capita income in car driving countries.  In the US, due to an increase in per capita income, gasoline makes up a smaller and smaller percentage of the average individual’s living expenses.  Thus, increases in gasoline prices are less important over time than when per capita incomes were lower, so people will not reduce their driving because of a small increase in a small portion of their living expenses.  Secondly, this increase in per capita income has allowed more individuals in the world who were formerly too poor to own cars the ability to purchase an automobile, increasing petroleum demand.  Finally, an increase in per capita income has allowed families who formerly could only afford a small, economy car to purchase a larger, more expensive (but luxurious) gas guzzler SUV.

Thirdly, the burning, distribution and extraction of gasoline creates serious environmental costs, and at some point these costs will need to be addressed and incorporated into the price of gasoline.  For example, burning gasoline contributes to global warming and lowers air quality during certain weather and traffic conditions.  Moreover, extracting gasoline causes serious environmental harm through accidents and destroying land to get to oil, and distributing gasoline harms the environment due to oil spills and other such events. (Source)

The Free-Marketeer will claim that we should simply wait until increased prices of gasoline make alternatives to oil more attractive, and the world adopts an alternative energy source.  This is a risky and foolish proposition.  The world as a whole is far too reliant on oil: not only to power cars, but to generate electricity and to create petroleum based products (there are a lot of petroleum based products out there).  If prices of petroleum were to significantly jump, it could dramatically shock the economy worldwide.  The Dow Jones already jumps up and down by hundreds of points each week due to oil prices alone.

It is true that much of the rise in oil prices today is a result of specific events, such as Middle Eastern instability, Hurricane Katrina’s destruction, and more.  However, the long term supply, demand, and external cost trends will result in an increasing price of gasoline in the long term.  It seems to be in the world’s best interest to take serious steps to conserve and research new fuels now, before the problem becomes much more serious.