Monday, January 21, 2008

The Big Economic Issues (1): Gas Prices

One of the two big issues that face our economy is gas prices. Nothing is happening to the prices; they just keep going up. It does seem that there is finally a little market resistance as prices go to the $3.50 range (using an average for regular unleaded), since prices seem to reach that area and then retreat some. Maybe this is consumer resistance or (more likely, I think) it's the oil market or its string-pullers.

I don't see that anything is going to change until either we see some real progress with alternative energy (which is still mostly unfeasible for general use) or until we have some external pressure to decrease demand.

As far as alternative energy: If "the magic bullet" were on the market today, it would still take several years for the effects to take hold, as new car and fleet buyers moved (reluctantly) to the new power, and then these vehicles trickled down through the used car market. We're talking probably ten years before seeing any meaningful effect and at least 20 years before we're off gasoline. That's after the clock starts, and we don't yet know when that will happen.

As far as decreasing demand: Flying in the face of the normal laws of economics, rising prices have not diminished demand.

We have seen gas prices go from the range of 30 cents to the range of $3.50 over the last 34 years. This occurred mostly in 3 short periods of huge jumps.

1. During the Arab Oil Boycott of 1973-74, the whole gasoline market was turned on its ear. Besides prices nearly tripling practically instantly, gasoline, always a buyers' market, became a sellers' market, as long lines formed at stations and such measures as odd-even limitations were imposed. Instead of gas stations fighting for customers by giving premiums, having price wars, and focusing on customer service (including freebies such as road maps), the station owners and operators (and the oil companies themselves) felt their new power. Instead of, "Please, please buy from me!", it became, "You don't like it my way, go find someplace else with gas." Even after the boycott ended (amidst rumors and conspiracy theories), the new pattern was set.

By the way, one interesting development was that prices trebled, then eventually fell back to double what they'd been, and everybody (responding to the press reports) was greatly relieved and saw the new prices as such a huge drop.

The fall of the Shah of Iran brought a repeat of the Boycott shortages and gas lines. However, the end result was only relatively moderate increases in prices, about 20 percent net. Again, though, prices rose a lot, then fell, and people were relieved that the prices were lower.

2. When Saddam invaded Kuwait, we had another shortage and another jump. Prices went from about a dollar to about $1.50, net. Same dynamics.

3. Prices were rising, enough to be in the news (with dire predictions of $2.00 gallons), until 9/11. As America froze for a few days, and as the airlines were stopped for several days, demand plummeted and so did prices. Of course this didn't last. For whatever reasons, the political pressure on Iraq, the uncertainty of the whole issue of terrorism, the world oil market started climbing, and remains so inclined as I write (although prices are down a little at the moment).

In none of these jumps has consumer demand dropped off. We've been willing to buy all the gas we could get, and pay any price for it. We've been tricked (by whom I'm not sure, but the news media have never failed to deliver the message to us) into being delighted when we end up paying up to double what we had been. We've been scared into being happy with the current price by forecasts of yet higher--all-time high--prices "certainly coming". And we've adopted a get-it-now-while-we-can attitude, which only runs up the price due to increased demand.

Ultimately, the only solution I see (on the way to weaning ourselves from gasoline) is gas rationing. I wrote about this on November 7, 2007, so I won't repeat it here.

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