Gas prices tend to drive our emotions

By DAVID MOON, Moon Capital Management
April 18, 2004

You may not have realized it, but gasoline isn't the only consumer product flirting with all-time high prices. Houses and automobiles have never been this expensive. Milk costs $3 a gallon ' more at the convenience store near my house. NASCAR and UT football tickets have never been higher. Core inflation (which excludes energy prices) just hit a three-year high.

Why all the drama surrounding gas prices?

Admittedly, prices at the pump have risen 20 percent in the last few weeks. But in the last year, the price of framing lumber is up 30 percent. Housing ranks pretty close to transportation as a necessity, so where are all of the panicked live television news reports broadcast from lumber yards or new housing developments?

When observing changes in the price of milk or automobiles, consumers are much more willing to mentally accommodate inflation ' the general tendency of prices to rise. Since 1920, if gasoline prices had increased at the same rate as have wages, gas would now cost $10 a gallon, excluding taxes. Adjusted for inflation, gasoline prices have steadily declined since the 1920s, with the obvious exception of the 1970s. Crude oil is cheaper today, in real terms, than both 50 and 100 years ago.

The justifications for gas paranoia are multiple. Some people simply hate the internal combustion engine and consider it a moral threat to humanity. Others are fearful of our seeming dependence on an area of the world that generally hates the US. Some people assume any man's riches must come at the expense of another, so they hate the oil industry simply because of its money. Some folks believe no one should be allowed to drive an SUV the size of a tour bus, consuming valuable natural resources.

Higher gasoline prices increase personal budget pressures on everyone. But there is a strange disconnect between the real relative impact of those price changes and the passion with which some people react to those changes. Why?

Lumber isn't nearly as political as oil.

Although there probably are people who would oppose cutting timber under any circumstance, the logging industry's foes pale in comparison to those of the oil industry. When lumber prices spike, most people consider it a fact of life and make decisions accordingly. (Of course, most people buy gas more frequently than they do 2x4s. But lumber price increases are felt by anyone who owns or rents a home, as those prices ultimately impact new construction costs and ultimately, rents and existing home prices.)

Despite the declaration of a recent New York Times article, our energy resources are not 'running on empty.' Geologists continue to locate new reserves, and extraction methods continue to decline in both environmental invasiveness and cost.

Gasoline is a political flash point; the furor otherwise makes no sense.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Add me to your commentary distribution list.

MCM website