While the news ominously reports record high gas prices, perspective is paramount. How does $3.20 a gallon compare to historical prices on an inflation-adjusted basis, wages, or other modern economies?
For a long-term view of American gas prices, take a look at these charts. $3.20 a gallon in 2007 is roughly equivalent to the price of gas back at its peak in 1981. Compared to wages, it now takes slightly more than 10 minutes of work at the average wage to buy a gallon of gasoline, again roughly equivalent to the work required in 1980. Taking a longer view, however, more than 12 minutes of work per gallon were required up until 1950, and folks back then didn't blink an eye when they filled their tanks. Perhaps more importantly, as a percentage of disposable income, current prices are far below 1981 levels. Looking at it this way, $3.20 a gallon is not cheap, but it remains affordable for a worker earning an average salary.
A typical commuter will burn around 1,000 gallons of gasoline per year, and the higher gasoline price changes spending priorities. People could buy smaller cars, use public transportation, carpool, or cut spending elsewhere. The first three options are impractical or unavailable in many cases, so Americans have simply cut back on spending elsewhere. Retailers have taken the hardest hit from this shift. Wal-Mart (NYSE: WMT ) has indicated several times over the past year that its customers cite high gas prices as a major concern; thus, high prices at the pump are possibly the root of recent same-store sales declines.
On the other side of the ledger, high prices are driving big profits at refining companies like Tesoro (NYSE: TSO ) and Valero (NYSE: VLO ) , and helped save the day for ExxonMobil (NYSE: XOM ) . Congress may be irked, but after dozens of investigations into the oil industry over the decades, the findings generally indicate that market forces set prices, not foul play.
Perhaps the strongest evidence that $3.20 gasoline remains affordable is that demand continues to increase. People continue driving, and they simply sacrifice in other areas of their budget to pay for it. Gas prices won't go down until Americans reduce consumption.
From an investment standpoint, until the debate shifts towards demand reduction, the oil boom will continue, albeit with several bumps in the road. If you want exposure to the oil patch, take a look at integrated companies like ConocoPhillips (NYSE: COP ) and Chevron (NYSE: CVX ) , which continue to sport reasonable valuations while paying healthy dividends.