Cost of Gas accounts for just 4.0% of personal consumption

As to be expected, the media is all over this disturbing trend in gas prices.Per usual, though, the line of reporting on this issue is sensational rather than rational.

At this time last year, the national average was $3.05 per gallon, up from an average of $2.91 per gallon at the same point in 2006 which, in turn, was up from an average of $2.24 at the same point in 2005.

The Energy Information Administration, a unit of the Department of Energy, reports that the national average for a gallon of gasoline as of May 5 is now $3.61. Presumably, that average will continue to go up as oil prices continue to increase.

A Scenario
We'll assume a vehicle is driven 15,000 miles per year and gets 20.3 miles per gallon, which is a rough estimate of the average fuel economy reported by the Environmental Protection Agency for model years 2003 to 2007 on light-duty vehicles.
For ease of comparison, we have taken the average annual price of gasoline reported by the Energy Information Administration for the years 2003 to 2007, and have computed an average price for 2008 through May 5.

Using these figures, we calculate the following:



The cost of gasoline is chewing up a larger portion of one's household income than it used to. It is an aggravating development, but ultimately, it isn't a death blow to consumers or the economy.

It may shock you to learn, too, that the cost of gasoline accounts for just 4.0% of personal consumption expenditures. That's not a typo. We're talking four percent, yet the media reports would have one think the cost is closer to forty percent. In effect, then, a 10% increase in gas prices reduces spending power by 0.4%.

Sensational stories sell more newspapers, of course, and get more viewers to tune in, particularly when the issue is one with which we can all relate.

The rising cost of gasoline gets everyone fired up so, naturally, in this election year some politicians are calling for a gas tax holiday. However, what we really need a break from are the half-baked reports on the impact of rising gas prices.

A rational approach when discussing gasoline costs would demand that there is an acknowledgment that high gas prices are dampening consumer spending. At the same time, it would reveal that high gas prices haven't damned the consumer to a monastic lifestyle.

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