The record on oil

In 1981, a postage stamp was 15 cents, a typical new home cost about $83,000, and the median household income was about $19,000. Today those numbers are 37 cents, about $217,000, and more than $43,000, respectively.

Remember that as you read press reports this month about "record high" oil and gasoline prices, and be skeptical. The number of dollars that it takes to buy a barrel of oil or a gallon of gas may be higher than ever, but that is not the whole story.

Headlines about supposedly record-setting oil prices began making the nation's business pages late last month. "Crude oil reached a record of $60.95 a barrel in New York on June 27," reported the International Herald Tribune. The Bloomberg news service added that "record oil prices" may hurt airline profits. The Associated Press reported that higher oil prices sent average gasoline prices up to $2.24 per gallon, "8 cents from the all-time average high of $2.32 set in April."

All of this sounds scary, but the first clue that it may not be so bad is what did not happen: The stock market did not tumble; consumer confidence did not plunge, with the Commerce Department actually reporting an increase in June; and Americans did not curtail their driving habits. (According to AAA, 40.3 million Americans traveled over 50 miles during the Fourth of July weekend, an increase of almost 1 million over the previous year.)

How can this be? When oil and gas prices jumped during the 1970s and early 1980s, economists talked about "stagflation," lines formed at gas stations, and the country was overtaken by what President Jimmy Carter called "malaise."

The reason for the difference: The real records for oil and gas were being set then, records that we have not even approached yet this year.

The problem today is that when reporters talk about records for oil and gas prices, they aren't adjusting for inflation. Oil and gas may cost more dollars than they did 25 years ago, but those dollars aren't as valuable and those prices don't take as big a bite out of people's incomes. Measured in constant 2005 dollars, oil hit $90 a barrel in 1981 and gasoline rose to over $3 per gallon.

This isn't to suggest that rising oil and gas prices aren't a drag on the economy; economists say the jump in oil prices this year has cost the economy about $75 billion. But the economy is still growing (at a 3.8 percent annual rate in the first quarter) and inflation is still relatively tame (about 3 percent). The U.S. economy is so much larger now than it was in the 1970s and early 1980s-and the typical American so much wealthier-that rising energy prices don't affect us as much.

Another thing to keep in mind: Americans may grumble at the price we have to pay at the pump, but then millions of us go into the food mart at the gas station and voluntarily pay 99 cents-the equivalent of $6.33 per gallon-for 20 ounces of something already abundant in every home: water.