Sometimes a little perspective is in order, and as gas prices hover at the $3/gal mark, it is one of those times. Yes, I remember pumping gas at my Dad’s Gulf station for $0.63/gal. And I remember when it broke $1/gal and everybody said it was the end of the world and nobody would ever pay that much for gas. Everybody is saying that now about the $3 mark. But we need to understand that our reactions to this are largely emotional responses. The math doesn’t hold.

What people forget is what inflation does to money. Because a dollar bill looks the same now as it did 20 years ago, the perception is that it’s worth the same. At least it feels that way. Most of us know that’s not true, but that doesn’t influence the emotion. Inflation drives both prices and wages (albeit not always at quite the same rate). The reality is that while we have been getting a bargain at the pumps in recent years, what we are paying now is not so different from what we paid from 1979 – 1983 in inflation adjusted dollars. The price was also this high during the depression in the 1930’s. This chart shows historical inflation adjusted gas prices. If you want a trip down memory lane, plug the prices you remember of other goods and services into this handy little calculator.

This is not to say that the recent steep price increase doesn’t hurt our wallets. Relative to a few months ago, the extra expense is clearly a drain. And no one would argue that there has been a sudden increase is wages to compensate. So the short term pain is absolutely real. But we need to get a little long term perspective here. It’s been this bad before. It will probably get better. The odds are with us.

An additional perspective is provided by this overlay of historical events onto gas prices. Note the strong correlation between peace in the Middle East (specifically Iran and Iraq) and the price of gasoline. This chart certainly suggests that we are directly responsible for the recent price increases. We invaded Iraq and created the instability which is driving the price up. Now it is likely that should we succeed in bringing stability to the region as Bush is planning, the price of gas will go back down. However, should we bomb Iran, your should prepare for seeing $4/gal in your rear view mirror.

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