Want to Drive?
I wish I was in economics because the stage is set for a perfect thesis.
For years I have said “It will not be until the price of gas reaches $3 a gallon that people will consider changing their driving habits”. Now that time has come and that is coming to pass. There is talk of gas on the east coast going from $2.80 (yesterday) to somewhere around $3.50 ~ $4.00 shortly and possibly staying there for a period of time measured in months.
Before I get into a few of my thoughts on the matter – here are a few important links
- Nationwide Gas Price Average (and historic charts)
- Report Price Gouging (if your $price does not fall instep with above)
For along time (my entire life) gas in the US has been a fascinating topic in economics because it has had a virtually inelastic demand regarding pricing – that is : any pricing we have seen up till now. As I have long believed we are about to see the beginning of the demand curve as gas passes the $3 point. As with all curves change will be gradual and I don’t believe it will be very noticeable until prices pass $3.50 or $4.
That isn’t thesis worthy though. There is another aspect that influences demand – the perceived spike. A change in price that is perceived as a temporary spike – rather than a permeant change – will be less likely to impact driving habits. Is one or two months long enough to change anything? I think so but it would pale in comparison to a 6 month change. At $4 a gallon I know many people that would begin to seek out a carpool – even among strangers.
Public Transportation take note : this is your queue. Part of the appeal of Public Transportation is that it is more efficient and it distributes the cost among more individuals. However – in general – the costs of running a public transportation system are pretty static and do not change with regard to usage of the system. This is their queue because as usage increases (note the optimistic attitude) it allows for usage of extra income (potentially a significant amount) for adding extra capacity and lines to help retaining the usage levels by increasing convenience even after gas prices have receded. Buses are an easy way to add capacity so I will not be surprised when additional lines/services/schedules are added.
Oh… and go buy a bike ;-)
4 years, 11 months ago
I think gas is one of those things that sometimes doesn’t fall into traditional economic models–not that it shouldn’t, but because of outside factors that are social and political. For an example, just look to the US sugar market and you’ll see what may happen to gas.
Here’s some things I think will happen:
(1) Open the strategic reserves to releave pressure (already happening). I really don’t think this will have much effect.
(2) Reduction in demand in the next few weeks as summer ends. Once again–no big changes (even though economically there should be).
(3) Political fallout — This will be what really moves the prices. Politicians will get an ear full from constituents and businesses. Congress will act by threatening oil companies to reign in their prices or else!!! Magically…prices will fall.
Should it happen like this or should we stay hands off and leave it up to good old supply and demand. Being a capitalist, I’d like to let market forces run their course. If prices stay high, people will cut back on consumption and the price will start to fall. However, in this case I don’t think this is the best method.
What I fear is a recession caused by reduced spending and inflation. To prevent this I think it would be wise for federal and state governments to lower or temporarily recend taxes on fuel. In most states this would reduce gas prices by at least 50 cents per gallon. I think this along with a threat to the oil industry (just whisper nationalization) will reduce the price of fuel enough to prevent a recession and keep prices bearable for the lower wage earners in this country. At the same time, gas prices would still remain relatively high enough to make many consider fuel economy, mass transit, hybrids and alternative fuels.
The main reason why I don’t think market forces can correct the situation is because the prices are not actually based on demand–rather they are based on irrational fear, speculation and profiteering by the oil industry. The oil industry is basically a monopoly (not really, but many companies acting as one is close enough), and they take advantage of these fears and even help create them. Even before recent events, prices were not in line with actual demand. There was already a lot of speculation built in.
In any case, I think it is an amazing process that no text book or model can accurately predict.
–Brad
4 years, 11 months ago
@brad: Good thoughts. I think there is also a part of me that wants prices to stay at $3.50 for just long enough to make people who needlessly have SUV’s to seem like idiots; but I also don’t think that it is best to allow prices to jump so quickly.
You bring up good points about political pressure lowering prices, or possibly dropping taxes for a while. I’m not sure what effect those will have, and as for the gas monopoly; all I can think about is the California energy “crisis”. Time will tell how much profitering the gas companies are actually partaking of now.
I believe there is a point at which the barrier to entry in a market (like gas) is so high that any established company can act as a monopoly simply because it would take so long for a new company to take advantage of that. I certainly can’t go compete against them by selling gas at a slightly lower price – while still taking a profit… and THAT would be the part of capitalisim that keeps things in check. (yes I know it happens some with multiple companies… but get real)
4 years, 11 months ago
Just as a comparison point, gas in England is the equivalent of $7 a gallon…
4 years, 11 months ago
We’re already paying $3.22 per gallon in Southern California (Los Angeles Area). I’m probably buying a bike as soon as time and schedule allows, and I’ve been investigating bus routes this last week. I’ve also been considering trading in my Korean Compact car for a more fuel-efficent Japanese Hybrid. In other words, i’m reacting to the market like an intelligent consumer: weighing alternatives and finding one which makes the most economic sense. If enough other consumers act the same way as I do, the market will no longer be able to bear $3.22 per gallon prices (or $4, or $5, or whatever it peaks at), and the price will fall. Once it starts falling, those who used to bike/ride public transit, etc.. will re-adopt driving as a commuting method. Eventually the gas prices will stabilize at whatever people are willing to pay for gas.
If we try to throw government regulation at the price, the end result is probably going to be more shortages and people who are actually unable to get gas. The gas companies can’t provide as much gas as the country needs at $1.95 per gallon any more, so instead they’ll just scale back production to the point where they can afford $1.95 per gallon. This means people will go without gas. I don’t know about the rest of you, but I’d rather pay $5 per gallon for gas than go completely without gas.