Getting Gas

Dr. Pournelle quoted from a book recently about a joke involving three people stuck in a deep hole.
The joke went on to say one of the three was an economist. When asked
what was the best way to get out of the hole, the economist said:
“First, assume a ladder.” Likewise, the author of the book said, do
economists say things like: “First, assume a free market.”

I recently looked at a US
Department of Energy article.
Although it may be too early to say if a long-term effect is in play,
it is interesting to note that while the price of gasoline in the US
hit near record levels (unadjusted for inflation), crude oil stocks
(one measure of demand) is up almost 2 percent over last year.

You would think, in a free market, that as price increased, demand would decrease. Yet, this
doesn’t seem to be occurring. What this says about the existence of a
free market in gas prices I can’t say. But if the price versus demand
trend is true, there are two predictions that can be made.

The first is that prices will continue to increase. Why? Because demand is increasing and as long as
that continues, so will price increases. Why customers continue to burn
more gas than they did last year, even as prices are at near record
levels is a question I cannot answer.

Secondly, unless they get more income, in order to pay for the more costly gas, customers will use
money intended for other uses. Anecdotally, I think I see this when I
go to many restraints and see empty tables and worried waiters. No, the
local McDonald’s and conversely, the high end restaurants, seem to be
doing fine. But the middle class diners seem to be hurting. Perhaps we
are also seeing it in a slow down in air travel (due to higher fuel
costs leading to higher air fares) from Asia. Japan is one of Hawaii’s
most important sources of visitor income. Said visitor numbers seem to
have begun to sharply decrease. If this continues, this will not be
good for our visitor-based economy. And
finally, it may also be seen in our shopping malls where I see fewer
people that I did before.

I wish I had answers to these questions but I don’t. What I can say is that, as gas prices continue
to rise, certain sectors of our economy will begin to decline. YMMV.
Insert disclaimer here.



One response to “Getting Gas

  1. The free market principle about price-increas = demand-decrease only works for non essential goods. For things that you -think to- absolutely need the link between price and demand isn’t stong. Say for axample toilet paper. Are you going to use more when the price sinks? Are you gone stop using it when the price rises? Sure there is a link but it is rather weak in such cases.