Monday, July 28, 2008

Is Gas really that expensive?

Everyone one is complaining about the high price of gasoline these day. Indeed, $4.00 is allot to pay for a gallon when you make an average salary. Most people blame OPEC, China, or speculators for the increase in the price of oil, but this like blaming the messenger, and misses the true shift that is occurring.

Inflation is commonly explained by the press to mean "rising prices", but this is incorrect. Inflation is an increase in the supply of money. As more money enters the system, it chases more goods and causes prices to rise. So rising prices is a symptom of inflation, not the definition of it, and not the cause.

One of the most insidious things about a fiat currency such as the US dollar is its ability to trick us into misunderstanding the true changes happening in our economy. Since we have be trained our entire life to measure the value of all things in terms of US dollars, it becomes very difficult for us to perceive when the dollar itself is changing.

To help illustrate the real cost of a gallon of gas over time, I have created the chart below to show the long term trend in terms of dollars and in terms of real money; silver.

It shows that gas is the same or even less expensive than it was in the 1950's if payed for in 1950's silver coins. In the 50's and early 60's gas cost about $0.30/gallon. One 1950's silver dollar contains 0.71 oz of silver and would buy you 3 gallons in 1964. Today, 0.71 oz of silver equals about $12....about the cost if 3 gallons on gas. Amazing!

If you were payed in silver dollars, as Americans were until 1964, then gas would still be cheap. The gas is not really going up. Its the dollars that are going down!

Source Data:
Average annual price of gas according to US DOE
Average annual price of Silver according to Kitco
2008 uses July gas price and average YTD silver price