Sometimes it appears that everything just keeps getting more and more expensive. That’s certainly the impression you’d get from reading the news – every time you open the paper, it seems, there’s another story about how to cope with the rising costs of food, education, or healthcare.
But if you dig deeper, you can actually find some good news. For some goods and services, prices have actually fallen – or at least, they have fallen in terms of real dollars, after you factor in the effect of inflation. Some goods, such as gasoline and airfare, have dropped in price just in the past few years. Others, such as solar energy and electronics, have been on a downward trend for decades and are now falling faster than ever.
The bottom line is, even in the middle of a prolonged period of belt-tightening, these items are now more affordable than ever. Here’s a closer look at the factors behind these declining prices and how they’re likely to affect you.
Gasoline
How Much Has the Price Fallen?
Back in 2011, gas prices were on the rise. John Hofmeister, the former president of Shell Oil, was quoted in CNN and other sources as predicting that the cost of a gallon of gasoline could hit $5 in 2012.
What happened instead, according to the price-tracking site Gas Buddy, is that prices peaked just shy of $4 a gallon in 2012, dropped to around $3.25 by the end of 2013, and then plunged precipitously in 2014. By the end of 2015, the average nationwide price of a gallon of gas was just over $2.
Why Is the Price Falling?
To understand the drop in oil prices, you have to know about the basic economics of supply and demand. Essentially, when the supply of a product is higher than the demand – that is, when producers have more of it than people want to buy – the price tends to fall. That’s because lowering prices is a good way to encourage people to buy more than they would otherwise.
In the case of oil, there are several factors combining to increase supply and reduce demand worldwide:
- Domestic Oil Production. U.S. oil production has been rising steadily since 2008, with new oil wells in the Gulf of Mexico and the rise of new techniques like hydraulic fracturing, or fracking. The New York Times reports that U.S. oil wells have nearly doubled their production in the past six years. This has boosted the world supply of oil, causing prices to drop, while also reducing the U.S. demand for more expensive imported oil.
- Foreign Oil Production. The U.S. isn’t the only country to have boosted its oil production. According to The New York Times, Canada and Iraq have been steadily increasing their oil output and exports. Meanwhile, Russia, Nigeria, Algeria, and Saudi Arabia are continuing to pump out oil as well, creating more competition for customers and further reducing prices worldwide.
- A Mild Storm Season. The Gulf of Mexico has some of the richest oil fields in the world, but production there is often disrupted by tropical storms and hurricanes that disable oil rigs. However, in 2014 there were fewer storms than usual, and none of them struck near the Gulf. This is one of the reasons the U.S. has been able to keep pumping out oil at such a high rate.
- Lagging Worldwide Demand. Even as the supply of oil is increasing, demand in some parts of the world is falling. Weak overall economies in Europe and developing countries are keeping a lid on their oil use. Improvements in vehicle fuel efficiency are also reducing the demand for gasoline.
How Do Lower Prices Affect You?
The most obvious way lower gasoline prices help you is in savings at the pump. If you’re a typical driver, you’ve probably already seen significant savings on gas. The Energy Information Administration (EIA) predicted back in January 2015 that the typical American household would spend about $750 less on gasoline in 2015 than it did in 2014. If your household has multiple cars or you put a lot of miles on them, your savings were probably higher still.
Less obviously, lower gas prices keep the cost of many other things low as well. For example, airfare (discussed below) is cheaper when the price of jet fuel is lower. But more significantly, nearly everything we buy in stores has to be shipped from somewhere else, usually on ships or trucks that burn diesel fuel. Low oil prices keeps those shipping costs down, which in turn helps to reduce the cost of consumer goods in general.
However, if you happen to live in an oil-producing state, such as Alaska, Oklahoma, or Texas, lower gas prices could be bad news for you. With profits falling, many oil companies are laying off workers to save cash – so lower oil prices could mean higher unemployment in your area.
Will This Trend Continue?
In the short term, gas prices will most likely stay low. In the autumn, the government slacks off on clean-air standards for oil refineries, allowing them to blend gasoline with cheaper fuels, like butane. This means cheaper and dirtier gas throughout the winter months.
Over the long term, however, oil prices aren’t going to stay low. Already there are some signs that production is about to decline in the U.S. and other oil-producing nations as oil companies put less money into new exploration. In addition, the demand for fuel is starting to recover in some countries where it has been low for a while. Lower supply combined with rising demand means that oil prices are likely to return to normal within the next couple of years.
Airfare
How Much Has the Price Fallen?
According to Bplans, one of the first commercial airline flights in this country was offered by Delta Airlines in 1929. It was a round trip from Dallas, Texas to Jackson, Mississippi, and it cost $90 – approximately $1,250 in today’s dollars.
Air travel grew a bit less expensive over the next several decades, but it was still an unaffordable luxury for most Americans. A 2013 story in The Atlantic notes that in 1958, when Frank Sinatra’s version of “Come Fly With Me” was a number one hit record, more than 80% of Americans had never been on a plane.
All that began to change with the deregulation of the airline industry in 1978. Between 1979 and 2014, the price of an airline ticket fell by nearly 40% in constant dollars, according to Airlines for America.
In the last decade or so, many airlines have begun to tack on added fees – for instance, charging separately for a checked bag or for a meal – so they can make money while still advertising a lower price. Factoring in these extra costs makes airfares look a bit higher, but they’re still dramatically lower than they used to be. A chart at AEIdeas, a public policy blog by the American Enterprise Institute, shows that even with added fees, the average airfare in 2011 was about 35% lower than in 1979.
Why Is the Price Falling?
The biggest factor behind the long-term drop in airfares is deregulation. Before 1978, the government set strict rules for airlines, regulating everything from where they could fly to what they could charge. These rules gave the airlines a guaranteed profit, so they had little reason to compete with each other. In fact, the government actually put limits on how low airfares could be; according to The Atlantic, in 1974, the price of a cross-country ticket had to be at least $1,442 in today’s dollars.
However, during the fuel crisis of the 1970s, the government decided to get out of the business of protecting airline profits. Without the regulations, airlines were suddenly forced to compete for passengers – and cutting prices turned out to be a good way to attract them. So the airline price wars began, and prices have fallen more or less steadily ever since.
In more recent years, a few other factors have also helped bring ticket prices down. They include:
- Lower Fuel Costs. As noted above, the recent drop in gasoline prices also makes airline fuel cheaper. This means airlines can get from city to city for less, and they can pass those savings on to customers.
- Travel Websites. Internet fare sites, such as Expedia and Travelocity, make it easier for travelers to find cheap flights. This, in turn, makes airlines compete even harder to offer the lowest fares.
- New Fees. At first glance, it seems like fees make traveling by air more expensive, but in reality, they make it possible for airlines to charge less for tickets and make up the money on extras like checked baggage and in-flight entertainment. This means that passengers who don’t actually want these amenities – for example, people who always travel with just a carry-on and bring a book to read – don’t have to pay for them.
How Do Lower Prices Affect You?
Because of the drop in fares, more people can afford to travel by air than ever before. In 1958, the year of Sinatra’s big hit, only one in five Americans had ever flown; since 2000, Gallup polls show that between 40% and 50% of Americans make at least one flight each year.
True, flying these days is also a bit more of a hassle than it used to be because so many amenities now cost extra. But people who really care about checked bags and on-board meals can still get them – they just have to pay for them. By contrast, budget-conscious travelers can make a game out of figuring out how to avoid airline fees – for instance, by bringing their own food and stuffing all their clothing into a single carry-on bag.
Will This Trend Continue?
At least in the short term, ticket prices will probably continue falling. An Expedia article on travel trends says airfare prices fell about 8% between October 2014 and October 2015 and predicts that this trend will continue.
George Hobica, founder and president of Airfarewatchdog, predicts in Travel Weekly that price declines will continue still longer. He says low fuel prices, increasing competition from low-cost airlines, and global financial instability are all putting downward pressure on prices. However, he doesn’t think the price declines will be very steep – instead, he says to expect “single-digit decreases” (less than $10 per ticket) until mid-2017.
Solar Energy
How Much Has the Price Fallen?
The price of solar energy has dropped dramatically since the technology was new. A chart at Clean Technica shows that in 1977, solar panels were tremendously expensive, costing nearly $77 per watt of energy produced. However, the price dropped steeply over the next decade, reaching $8 a watt by 1988.
For the next 20 years or so, solar energy prices remained relatively stable. However, recently, they’ve begun to drop sharply yet again. A September 2015 report from the Lawrence Berkeley National Laboratory (Berkeley Lab) shows that between 2009 and 2015, solar costs fell by nearly 70%. Today, commercial solar energy in the U.S. costs an average of just $0.05 per kilowatt-hour (kWh) – less than the wholesale price of electricity in some areas.
Why Is the Price Falling?
The main reason that the prices of solar energy systems keep falling improvements in the technology. Solar companies keep finding ways to make solar panels both cheaper and more efficient. In October 2015, a company called Solar City unveiled a new solar panel that it claims can produce 20% to 40% more power than any other module on the market, yet costs significantly less to make.
Another factor is that companies have become better at determining where to put large-scale solar systems and how to get the most energy out of them. A September 2015 report from the Lawrence Berkeley National Laboratory says that these improvements have significantly boosted the efficiency of new solar projects just in the past several years. On average, new solar projects built in 2011 produce energy at 24.5% of their capacity; for projects built in 2013, that number is up to 29.4%. That means newer systems are nearly 20% more efficient than those just two years older.
How Do Lower Prices Affect You?
So far, the plummeting price of solar power hasn’t led to any noticeable drop in most people’s electric bills. In fact, in most areas – even those with big solar plants – people are actually paying a bit more for their electricity than they did a few years ago. Although solar energy has grown by leaps and bounds since 2011, it still accounts for less than 2% of all the energy consumed in the United States, according to the U.S. Energy Information Administration. That’s not enough to make a dent in overall power costs.
However, if you’re interested in green living, the falling price of solar power makes it easier than ever to use it in your home. According to Clean Technica, it’s now possible to install a complete home solar system – panels, inverter, installation, and all – for about $4.50 per watt on average. In some states, such as Hawaii, California, and (surprisingly) New York, a home solar setup can pay for itself in less than 9 years and save you more than $30,000 over a 20-year period.
Will This Trend Continue?
Experts disagree on this question. Mark Bolinger, a coauthor of the Berkeley Lab report, told National Geographic that he believes solar will continue to expand in the future, but “prices won’t keep tumbling so steeply” as they have in the past decade.
By contrast, Paddy Padmanathan, CEO of the Saudi Arabian power company ACWE, told the Australian publication RenewEconomy that he expects to be able to cut his company’s already low solar power prices by another 30% in four to five years. Analyst Visal Shah of Deutsche Bank is even more optimistic, telling RenewEconomy that he expects to see prices fall by 40% over the next four to five years.
Electronics
How Much Has the Price Fallen?
Virtually all electronic items have dropped dramatically in price over the past several decades. Bplans offers an interesting and somewhat nostalgic chart showing how much various electronic items cost when they were first introduced:
- Television Sets. The first television set, the RCA TRK-12, made its debut at the 1939 World’s Fair. It had a 12-inch screen and was housed in a massive wooden cabinet, and it cost $600 – more than $10,000 in today’s dollars. Today, RCA offers a 48-inch flat-screen TV for around $400.
- Home Computers. The first home computer, the Olivetti Programma 101, came out in 1965. It read programs off of paper punch cards and output the results on a tiny built-in printer. Its price was $3,200 – more than $24,000 in today’s dollars. Today, you can get a full desktop PC, including a monitor, keyboard, and mouse, for around $500 or less.
- Video Game Consoles. Magnavox introduced the Odyssey, the earliest video game console, for $100 in 1972. In today’s dollars, that’s about $570. Today, the Microsoft Xbox One is available from many stores for as little as $350.
- Laptops. The first laptop computer was the Epson HX-20, introduced in 1982. It had a tiny display screen, a microcassette drive, and a tiny dot-matrix printer, and it sold for $795 – about $1,950 in today’s dollars. Modern laptops average between $250 and $500.
- Cell Phones. The first cell phone, the Motorola DynaTac 8000X, came out in 1983. It cost nearly $4,000 – about $9,500 in today’s dollars – and had the size and heft of a large brick. Today, you can buy a Motorola smartphone for as little as $100.
- Music Players. Even newer devices, such as MP3 players, have seen drops in price. The 5GB iPod Classic, introduced in 2001, cost $400 at the time, the equivalent of about $535 today. The latest iPod Touch comes in capacities from 16GB for $200 to 128GB for $400.
Why Is the Price Falling?
Like solar panels, electronics keep getting cheaper because of technological improvements. When products like TVs or home computers first become available, they’re usually very expensive. But over time, as the demand increases, more and more companies start making the product.
To win over customers, these competing companies start figuring out ways to make their products better and cheaper. This means that the longer a product has been on the market, the more its price falls – even as quality improves. That’s why TV sets today have bigger screens, lighter cases, and clearer pictures, despite their lower cost.
Technological change doesn’t always happen at a steady pace. Every so often, major breakthroughs happen that cut costs dramatically. For example, the invention of digital cameras made photography much cheaper, because capturing images electronically costs less than capturing them on film. New breakthroughs can also cause older products to drop suddenly in price. For instance, when HD televisions were first introduced, older TVs that couldn’t capture HD signals dropped in price because fewer people wanted them.
A final factor in the falling price of electronics is lower labor costs. Nowadays, most factories making these products are found in foreign countries, such as China, where wages are much lower. This helps keep manufacturing costs down, which in turn keeps prices down. The downside, of course, is fewer manufacturing jobs for workers in the United States.
How Do Lower Prices Affect You?
As new gadgets become more affordable, they also become more popular. When TV was a brand-new technology, very few people actually had a TV set in their homes. Now it’s rare to see a home without one. Similarly, cell phones, which in the ’80s were only used by hot-shot executives, are now so common that many people are dumping their landline phones entirely.
The spread of new technologies has changed the whole world in ways that are both good and bad. For example, cell phones make it easier to stay in touch with people and to get help in an emergency. But they can also be annoying – for instance, when they ring in the middle of a movie or a concert – and they can even endanger lives by causing people to drive carelessly. Similarly, laptops and tablet PCs make it easier to work from home – but they also make it harder to take a vacation without being expected to check in at work.
Will This Trend Continue?
The drop in electronics prices isn’t a short-term trend. In fact, it has been going on for as long as there have been electronics, and there’s no reason to think it will suddenly end. The main factor behind it – new innovation spurred by competition – certainly isn’t going away.
In the future, more new technologies that are rare today – or perhaps don’t even exist yet – are sure to become common as the price falls. In turn, this is sure to change the world in ways we can’t possibly predict today. The only thing we can be sure of is that the world of 2065 will look a lot different from the world of today.
Final Word
There’s no denying that the cost of living, on the whole, is rising. And it’s also true that the prices of some things, such as housing, healthcare, and other services, are rising faster than the rate of inflation overall.
But it’s also important to remember that while many of the things we buy every day are growing more expensive, others are headed in the other direction. That means you can keep your household budget balanced by cutting your spending in the categories that continue to rise, leaving you more to spend in the categories that are declining.
How have falling prices for gas, airfare, solar power, and electronics affected you?
