Gas prices and Supply and Demand

There was a drought here back in the 80s. People were urged to cut their water usage, and they did. When the drought was over people continued to use less water than they had been using before the dry spell. The water company said that since they were selling less water, they had to raise prices to continue to provide service.

Okay. Gas prices are high. Let’s assume that everybody see the light and replaces their gas-guzzlers with very efficient cars. I think that gas prices would plummet initially in an effort to get people to buy more product. But what happens if Americans keep driving their 50mpg Geo Metros or 70mpg hybrid Toyotas? Won’t the oil companies raise prices so they can “stay in business”? Are prices high in other countries because other countries have fewer cars (I’m guessing that they do, since public transportation is better) and those cars tend to get better mileage than U.S. cars?

Mr. L.A., I think you are exactly right. Except for the part about them initially lowering their prices. I don’t think they’ll even do that.

The first time I saw the ad on TV this year for the new car that gets 70 mpg, I thought, “If this is the trend of the future, the net result will be gas that’s at least $2.50 per gallon.”

Little did I know that that day is coming real soon, whether we all buy those little gas/electric hybrid cars or not.


“You should tell the truth, expose the lies and live in the moment.” - Bill Hicks

Well, Johnny. You’re pretty much right, but keep in mind that supply and demand is a pretty much self-adjusting principal. Low demand will drive prices up, but what we’re experiencing right now is higher prices due to reduced supply. The higher prices will cause demand to drop and bring about the 70 MPG cars. Prices won’t drop, but the expense on people will lighten due to better efficiency. This, of course, will not happen until the public realizes that the prices are not going to drop, regardless of the amount of protesting.

As demand drops, the oil producers will start increasing supply in order to shore up their loss of profits. This has the effect of lowering prices (or more likely freezing them until inflation makes it cheap again). Then we’ll go back to where we are now, with Americans buying and driving gas guzzling luxury and high-performance cars. It’s a cycle. The same thing happened in the 70s, and it’s taken 20 years to come around again.


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Supply and demand eventually find an equilibrium point, but that doesn’t mean we can’t influence it (the same is done with subsidized crop prices).

What I hate is that the some of the freakin’ OPEC countries that wanted help from the US to save them from Saddam, are now the ones who are cutting production (supply) to keep prices artificially high when we want it lower. Maybe we should just let Iraq overrun Saudi Arabia and Kuwait and then get cheap oil from them Sadam!

I’m worried that these high gas prices will keep people from buying SUVs, new cars in general. That is the type of thing that could trigger a recession, and all that money made (on paper) in the stock market will go down the drain.

Gimme cheap gas for both my V8 SUVs!!!