Rising gas prices … what’s that all about?

While politicians like to point fingers, rising gas prices is simply a matter of supply and demand.

There is no single cause. Robert Ready, a finance professor at the University of Rochester’s Simon School of Business, studies oil supply shocks. As Oil becomes more expensive to tap and the world demands more of it, there is an increasing strain on the available supply. That means a single unexpected event – whether Middle East unrest, a pipeline explosion, or a hurricane in the Gulf – can disrupt supply and send gas prices higher.*

Energy demand is growing globally, as well, as more countries begin to expand their economies in ways that need more energy consumption.

So … supply shock combined with increased demand are the primary drivers of prices … this works for oil just as it does for anything else. Prices also fall when supply and demand works the other way too. In the case of energy though, it is likely that demand will only continue to grow.

People slowly adjust their mental price reference points. $3.00 a gallon gas was unthinkable years ago … where opinion polls put the unthinkable (and worrisome) price of gas just under $6.00 today. What changed? We got used to $3.00 a gallon gas. Just like we’re used to $1.00 candy bars when I remember candy bars going for 0.10 to 0.25 cents! And the size of the package has shrank too. A gallon is still a gallon so package size tricks can’t be played with gas; thus prices go up when packaging size is forced to stay the same.

My point? We adjust.

See also:

Role of Speculators

Do Oil prices affect the stock market?

A prudent plan incorporates diversification so that the effects on one area are not the same effects on another.

*Source: Horsesmouth: “Beyond the Gas Price Blame Game, a Thorny Case of Supply and Demand” by [email protected]

 

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One Response to Rising gas prices … what’s that all about?

  1. Larry Frank, Sr. March 26, 2012 at 8:13 pm #

    Since this went live I came across this article in The Economist that shows how much gas pump prices have increased across the globe. So this is not a US only problem. They conclude that much of the price increases is due to supply. http://www.economist.com/blogs/graphicdetail/2012/03/daily-chart-18

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