Have gasoline prices really risen?
Ok, everybody knows that the price of gasoline has been steadily rising for some time now. The media is flush with images of frustrated drivers, posturing politicians, and scapegoat oil executives testifying before the Senate. What and who's to blame for the rising price of gasoline? Is it all supply and demand?
First of all, let's be sure that gasoline prices have really been rising--after all, lots of prices rise over time. What we're really interested in is the relative price of gasoline (that is, the price of gas relative to the overall price level). The chart below shows gasoline prices from 1976 to 2008. You'll see two lines in the chart: the blue line represents the "current" dollar price while the red line represents the "constant" (or inflation-adjusted) price of gasoline.
Notice that the constant dollar price of gasoline rose quite dramatically in the late 1970s and then steadily declined until the mid-1980s and was essentially flat until the late 1990s. Since then, the real (constant dollar) price of gas has again risen quite dramatically, reaching an all-time high just within the last month or so.
So, why is the price of gasoline rising? The simplistic answer is that it's all supply and demand. To explain a rising price it could be that the demand curve is shifting out to the right or that the supply curve is shifting to the left. What factors are most people pointing to as shifting these curves? How can we tell which factor is the dominant cause of the rising gasoline prices? (This question is analogous to Question 5 from Chapter 3's Problem Set II.)
3 comments:
There are numerous reasons for the rising gasoline prices. Yes, the rise is partly due to supply and demand. China and other countries are starting to increase their fuel consumption, which in turn allows the price to rise. Another reason for the rising gas price is due to the price it costs to find and reach the reservoirs offshore. Many people hear about the offshore drilling, however they do not realize that an offshore rig can cost from ¼ of a million dollars a day to 1 million dollars a day to rent. Nearly all the easy to reach reservoirs have been drilled and depleted. The higher difficulty and higher uncertainty per well also allows the price to rise. The falling value of a dollar is another reason for why gas prices may continue to rise.
I strongly believe in this blog post because I, like the author, think that the price of gasoline has looked like it has risen on paper, but in actuality, the price for everything has risen. Americans are technically making more money now than in the 70's but a gallon of gasoline cost 70 cents back then. Given this fact, one can realize that since the minimum wage back then was about 2 dollars, the people were still paying the same amount for gasoline as they do now.
In response to the question, "What factors are most people pointing to as shifting these curves?", I agree completely with the last two comments. As well as many other theories. Anymore, cars are not the luxury they were one time considered to be. Everyone has one, and its no longer sometimes special. Like the cost of drilling, there is also a factor in delivering the gas across the world. Proximity plays a huge role. For example, gasoline in states along the Gulf Coast often have the cheapest gasoline of all. They are close enough to receive direct pipeline distribution. Refinery maintenances also put a damper on the production of gasoline. The drilling equipment and refinery all need to be updated to the fullest to keep up with demand, but when action is taken, they often get slightly behind. Last, from a marketing standpoint, any attention is positive attention. Remember that commercial "Head On?" Of course you do, have you tried it? Maybe not, but someday when you have a splitting headache and its the only thing around except for something you've never heard of, you will. Like this form of advertising, the negative attention that the gasoline industry is receiving isn't necessarily such a bad thing.
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