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Gas Prices and The Law of Supply and Demand |
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One would think that as gas prices continue to spike upward, our gasoline usage would be dropping dramatically. But that’s not the case.
Consider these statistics from the Energy Information Administration: From the third week of May in 2007 to the third week of May in 2008, the average price of unleaded gasoline rose in the Unites States increased 21.9%, from $3.20 to $3.90 per gallon. During the same period, our consumption has dropped from 9.36 to 9.30 million barrels per week, a decrease of only 0.6%.
Comparing data for other months reveals an even greater disparity. The third week of January 2008 showed a 50.4% price increase from January 2007, alongside an 0.4% increase in consumption. On average, 2008 has so far shown a 37.6% increase in prices and only a 0.58% drop in consumption.
Certainly, such a sharp rise in prices for virtually any other commodity would prompt significantly less consumption. It’s the law of supply and demand. As prices go up, demand goes down, and vice versa. But the law of supply and demand doesn’t seem to be working for gasoline. We are consuming virtually the same amount of gas per capita in the United States as we did a few years ago, when it cost less than half what it does now. What is different about gasoline?
For one thing, most other commodities have choices. If the price of bread jumps, we can cut our bread consumption and eat something else. But we don’t have many choices when it comes to transportation. In many places without adequate public transportation (which would be the majority of the nation), the options are drive a car or use human-powered locomotion.
But perhaps there’s another reason for our steady consumption in the face of skyrocketing gas prices. Imagine that a loaf of bread costs 10 cents. How much would we buy? Perhaps more than we do now, but there’s a limit to how much bread we can consume. If it were 20 cents, you’d probably buy the same amount: as much as we could possibly use. At these levels, price is irrelevant. The only thing that matters is how much we want.
The price of bread would have to reach some sort of threshold, above which the law of supply and demand takes hold - above which price becomes a determining factor in how much we buy.
The price of gas in the United States seems to have been below this threshold of supply and demand for many years. We have gotten spoiled on the luxury of being able to drive more or less anywhere we want without having to take the cost of gasoline into consideration.
Five years ago, in my Honda Accord, a 10 mile trip consumed about 50 cents worth of gasoline - not even enough to make me think twice. Today, such a trip costs about $1.20 - still not enough to make me change my plans. Were gas to hit six dollars a gallon, I might decide to stay home. That’s the the supply and demand threshold for me. For longer trips, however, I have already reached the threshold. My family decided not to drive to the beach this spring because of rising gas prices.
Middle class Americans have apparently not yet reached the supply and demand threshold when it comes to gas, at least not for local driving. But the poor and the working class have long since reached their threshold. They have had been forced to sacrifice buying gasoline in order to afford food, medicine, or the rent. And this is placing an added hardship on their already difficult situations.
Perhaps it time for us to make the conscious decision to cut our gasoline consumption - not because we can’t afford it, but for the sake of those who are truly suffering during this recession. The causes of high gas prices are multiple and complex, but if those who can still afford to drive can drive less, it will help the law of supply and demand kick in sooner, and it will help gas prices come back down - which, in the end, will be good for all of us.
Let’s show a little discipline in our driving habits for the sake of justice!
(originally posted at Discipline For Justice)
Jim Moss is a Presbyterian minister from Honea Path, South Carolina. He publishes a blog and a quarterly newsletter called “Discipline for Justice,” which focuses on ways North Americans can live lives that promote peace and economic justice.
Actually there is a term for this in economics. It’s called price elasticity! The cost of goods that are easily substituted, like chicken and beef, are elastic. This means that as the price of one commodity goes up, the demand for the substitute good increases and therefore will cause the price of the inflated good to come back down– Otherwise they would lose a lot of money. Inelastic goods, like gasoline, is different because right now there is no comparable substitute. This means that as prices rise the demand will be the same at virtually any price. As soon as we develope that competing good, and keep the government out of regulating it, you can bet that the price of oil will fall.
It’s all in the context you view it in. When you put it in terms of percentage, it does seem like a lot. Put it in historical context, it IS a lot. Gas consumption hasn’t been this low since 1997 when we had 50 million less people in the country. Put that into perspective….