Wednesday, April 23, 2008
The Demand of Supply
So, why are gas prices so high? Well understanding this means we must understand how the price develops. The economic laws of supply and demand tell us that price raises for 2 reasons: low supply and high demand. Anyone who's seen the news recently knows that these things describe our present situation pretty well.
Demand is normally easy to deal with. The U.S. has used more gasoline year-over-year every year since 1991 . . . until now. According to the Kansas City Star, U.S. gasoline consumption is, so far, down 0.2% compared to this point last year. The big tell will be at the end of May; Memorial Day weekend is the single biggest gasoline consumption weekend of the year, and incidentally, the highest priced point of the year (look at 3 of the 4 peaks on this chart). Prices will certainly continue to rise through the end of May, but one would expect that this decrease in demand would have some kind of effect on future prices. However, is it enough yet to curtail the effect that low supply will have? Only time will tell.
Now the supply end of this beast is the really complicated one. Supply involves the overall availability of crude oil, how much the U.S. can produce or buy, the rate at which it is refined, and how much the gas stations believe they need to charge. Which of these parts is responsible for the problem? All of them.
Next time we'll tackle the problem at the source, domestic and foreign oil supplies.
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