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Despite a price drop, gas remains expensive

The decline in gasoline prices over the last four months has been sharp and surprising. But for Americans wondering why their family budgets still feel strained, part of the answer is almost as surprising:

Gas is not actually that cheap, at least not when compared with its level for much of the last 30 years.

At $2.03 a gallon – its current nationwide average ($2.53 in the Buffalo Niagara region) – a gallon of gas is still more expensive than nearly anytime in the 1990s, after adjusting for general inflation. Over a 17-year stretch from the start of 1986 to the end of 2002, the real price of gas averaged just $1.87.

That era of cheap gas is easy to forget. Yet it offers a couple of important lessons about two of today’s biggest economic (and political) issues: climate change and the great wage slowdown.

Political leaders – from President Barack Obama and Hillary Clinton to Jeb Bush and Scott Walker – have been signaling in recent weeks that they consider the wage slowdown to be the country’s most pressing issue. And it’s clear that energy plays an important role in it. The beginning of the wage slowdown roughly coincides with the end of the era of cheap gas, which is no coincidence. Energy costs are a major expense for most middle-class and poor families, taking a chunk out of their real (that is, inflation-adjusted) wages.

One of the surest ways to end the great wage slowdown would be for the United States to make sure it’s entering a new era of cheap energy. “It’s the proverbial tax cut,” says Daniel Yergin, vice chairman of the research firm IHS and author of a Pulitzer Prize-winning history of oil.

If energy costs remain at current levels, it would put $180 billion into Americans’ pockets this year, according to Moody’s Analytics, equal to 1.2 percent of income and a higher share for lower-income households.

That’s why taking virtually every step to keep oil costs low – “drill, baby, drill,” as the phrase goes – would make a lot of sense, so long as oil use did not have harmful side effects.

The most obvious way to hold down the price of oil is to increase its supply. The earlier era of cheap gas was made possible by technological advances that allowed for a surge of supply in the 1980s from northern Alaska and Europe’s North Sea. Mexico also became a major producer. The recent drop in oil prices, similarly, stems in part from supply increases in Iraq and Libya. Even more important has been the shale-oil boom (also known as the fracking boom).

The problem, of course, is that oil use does have side effects. It leads to carbon emissions, which are altering the world’s climate. Last year was probably the planet’s hottest since modern records began in 1880, and the 15 hottest have all occurred since 1998. Oceans are rising, species are at risk and some types of severe storms, including blizzards, seem to be more common.

More oil production, then, involves enormous trade-offs: A healthier economy, at least in the short term, but a less healthy planet, with all of the political, ecological, health and economic downsides that come with it.

Is it possible to get the benefits of more energy production without the drawbacks? Yes, at least in part. Fracking is less carbon-intensive than conventional oil drilling (though fracking brings other dangers that need managing). Clean energy – like wind and solar – would be better yet, if it could become even cheaper.

Then there is the other side of the oil price equation: demand. A second reason that gas prices fell so rapidly in the early 1980s was the series of conservation efforts that followed the 1970s oil shocks. Fuel-economy standards, signed by President Gerald Ford in 1975, forced automakers to replace gas guzzlers with smaller, more efficient cars. Electricity plants began using natural gas or nuclear power in place of oil.

The conservation didn’t last, though. Its success brought about its own demise. Low gas prices, for years on end, persuaded many drivers to give up their small cars. When the era of cheap gas began, in the mid-1980s, the Honda Accord, the Ford Escort, the Ford Tempo and the Chevrolet Celebrity – all modest-size – were among the country’s 10 best-selling vehicles. When the era ended, in 2002, the Ford Explorer, the Chevrolet Trailblazer, the Chevrolet Silverado and the Dodge Ram were all among the best-selling.

Left to its own devices, the energy market will repeat this cycle. Low prices will cause supply to grow more slowly – both clean and dirty energy – and demand to grow more quickly. It’s happening already.

Sales of SUV and pickup trucks were 12 percent higher in December 2014 than December 2013. Car sales rose just 5 percent in the same period. As Yergin notes, shale-oil production will slow if oil prices remain where they are.

There is a whiff in the energy market of what Winston Churchill lamented as “the endless repetition of history.” Breaking that cycle certainly wouldn’t be easy, but it would be one of the biggest things that economic policy could accomplish in coming years: finding a way to cement a new era of cheap energy, one that’s more enduring than the last one and that doesn’t do nearly so much climate damage.

We are at least off to a decent start. Fracking (like nuclear energy) has the potential to increase supply without as much pollution. Wind and solar power have made major progress, though not yet enough in most cases to compete on their own with oil and coal. And the Obama administration, the current Chinese government and possibly the current Indian one are taking conservation more seriously than their predecessors.

The period of cheap oil that began in the 1980s wasn’t preordained. If anything, it was the exception to the modern history of energy. But the fact that oil has been even cheaper than it is today – and for years on end – does offer reason for economic hope.