Gas Price Increases Won’t Persist

March 12, 2011
The law of supply and demand does not apply. Speculators rule. We (literally) pay the price.

Is $3.75 per gallon the new normal, or will this be just another bump in the road? Experts are attributing half the price increase since last fall to competition with India and China. That is unlikely to change. The price increases during the past couple of weeks are harder to explain.

The situation in Libya is very troubling from a humanitarian perspective, but Saudi Arabia has committed to replace Libya’s 2% share of world oil production. Experts have indicated there is no shortage of oil or gasoline in the supply system, so emotions and potential profits, not market principles, underlie the recent price spike. This, too, shall pass.

U.S. consumers have shown a remarkable ability to rapidly reduce gas consumption in response to historic price hikes. The result has been clogging of the distribution system, which has often lead quickly to price decreases to clear out the excess inventory. Thus, in ordinary circumstances, we profligately waste gas, but we know how to conserve when that matters.
The gas price roller-coaster rides we have taken in the past have braced us for a future that is not built upon a cheap energy foundation, but it hasn’t lead to widespread industry retooling, business model revision, or personal behavioral adjustments. We have, however, sold our clunkers, greased our bikes, and identified trip-combining opportunities – our personal transportation “Easy” buttons. The future is likely to demand more.

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