Supply, Demand, and Gasoline Prices

We generally accept that prices rise and fall. A comparison of gas prices just before hurricane Katrina to one year earlier reveals a difference of about a half dollar. Modern economics tells us price is directly proportional to demand and inversely proportional to supply. They give the reason as the need to burn off inventory or produce more when needed. This is one of the first things economics students learn, and can be found in any basic textbook.

A closer look at this situation reveals a problem never addressed, at least not completely. The oil supply is a natural resource, and therefore limited. As we exhaust more oil reserves, those same reserves become scarcer. The result will be that gasoline prices will reach the point where only the rich will be able to afford it. Many realize this favors the rich; others seek to improve production to make the product more available. The problem is that if oil production increases, the natural reserve will exhaust sooner.

Here lies the problem. If the price of gasoline goes too high, those families who need a job will become unable to find one because their gas tanks will remain near empty. Supply drops and prices come down. Suddenly, everyone trying to get a job goes out almost all at once. Not only do prices skyrocket even worse, but frustration sets in, leading to unbelievable social problems. A similar effect occurred after Katrina, when the gasoline used by those fleeing the area increased demand, combining with the damaged production.

Economists do not question the concept of basing price on supply and demand, and they have one indisputable point. In order to produce enough to satisfy demand, the funding of additional supplies, equipment, and labor may require a price increase. At the same time, the favoring-the-rich theory seems to lack a sound opposing argument.

With perishables, such as wheat, burning off inventory seems to the correct thing to do. But unlike natural resources, food supplies grow back. Supply and demand can work, but only if it does not create negative social or environmental aspects. A food shortage is worse than a gasoline shortage because the fear of death causes people to act with insanity. This is seen in New Orleans, as much looting involved food.

If price remains the same, the “law of averages” can set in with the creation of better products. When the now second-best product falls in demand, the fixed price will help keep them afloat until they improve the product. Of course, if they do not find a better product, they go out of business. Meanwhile, the new product makes a bigger profit, making purchasing new equipment and supplies possible, a requirement before hiring additional labor. Product quality becomes the main selling factor, but production increases at a slower rate.

So, the question is: Is basing price on supply and demand the right thing to do? Economists say that demand will drop off at a certain price level, but one recent report says people are committing crimes just to pay for gasoline. The social negatives of our economic systems are slowly being revealed.