Record gas prices push energy spending to near 1980s levels
Tuesday March 11, 2:04 pm ET
By Steve Hargreaves, CNNMoney.com staff writer

So gasoline prices are at an all-time high. But after adjusting for inflation, rising incomes and better fuel efficiency, how bad are they really?

The experts' answer: Bad. Nearly as bad as they've ever been, and not likely to get better anytime soon.

Adjusted for inflation, gasoline at $3.227 a gallon, according to AAA, is still about 18 cents below its peak of $3.405, set in March 1981, according to the Energy Information Administration. And Americans are spending about 6% of their total disposable income on energy, down from about 8% in 1982.

But prices are higher then they have been at any time in recent memory. In 2002, when many people may have bought a vehicle they are still driving today, Americans spent just 4% of their income on energy. Gas prices, adjusted into 2008 dollars, were at a near all-time low of around $1.30 a gallon.

"It really hasn't reached a level it did in 1982, but it's approaching it," said Kay Smith, an economist at EIA. "It's becoming a burden."

Moreover, Americans haven't spent this much of their income on energy since 1986. Except for a few months, inflation-adjusted retail gasoline prices didn't cross the $2 a gallon mark anytime in the 18 years between 1986 and 2004.

Now there are some studies that say it's not really that bad.

In 1980, the average American had to work 105 minutes to buy enough gas to drive the average car 100 miles, according to Beth Ann Bovino, a senior economist at Standard and Poor's. Now, the average American needs to work only 53 minutes, thanks to better fuel efficiency and higher wages.

"Even though it certainly doesn't feel so good at the pump, we're a bigger economy and we make more money," said Bovino.

And some people, usually Europeans, like to point out that gasoline is still far cheaper in the United States than it is in Europe, where it can cost upwards of $8 a gallon.

Others argue that's it's not fair to compare the United States and Europe, as Europe's high prices are largely due to taxes, which are then used to fund public benefits such as mass transit or cheaper health care.

Either way, most economists agree that these current record gas prices are beginning to take their toll.

For each penny increase in the cost of gas, U.S. consumers pay an extra billion dollars a year, said Dean Baker, assistant director at the Center for Economic and Policy Research. So to go to $3.22 a gallon from $1.74 a gallon in March 2004 is costing an extra $148 billion dollars this year alone.

"There's definitely a hit," said Baker. "It doesn't explain the recession, but it certainly adds to it."

Falling home prices and the loss of jobs are the main reasons behind the economic downturn, economists say.

But food prices have also risen with gas prices, as the economy worsens and investors of all stripes pour money into commodities as a hedge against inflation and the falling dollar.

Food prices rose nearly 5% in January, the highest one-month gain since December 1990, said John Lonski, chief economist at Moody's Analytics.

"It's a drag on consumer spending," said Lonski. "Consumers right now are suffering from a double whammy."

For those hoping things will get better, there may be a while to wait. EIA predicts gas prices will remain above $2.70 a gallon until at least 2010.