I've been waiting for the linked article for quite some time now, and finally AP has come through: price of oil is starting to hurt the economy.
How long has it been since we last saw $85 oil?
But I digress.
The linked article says this:
Oil has topped $108 a barrel, the highest price since 2008. Regular unleaded gasoline now goes for an average $3.69 a gallon, according to AAA's daily fuel gauge survey, up 86 cents from a year ago.Eighty-six cents from a year ago.
How many miles do you tell your insurance company you drive every year. Yup, 12,000 miles or 1,000 miles/month.
[If you are driving a car that gets less than 20 miles per gallon, this post does not apply to you. But then again, there's been plenty of time since 2008 to find a vehicle that gets 20 mpg. By the way, President Obama thinks it is something to laugh about if folks are still driving vehicles that get 8 mpg.
“If you’re complaining about the price of gas and you’re only getting 8 miles a gallon, you know,” Obama said laughingly. “You might want to think about a trade-in.” Let them eat cake.As I've said so many times before, I can't make this stuff up.]
If you drive 1,000 miles/month (like you tell your insurance agent) and you get 20 mpg, that works out to 50 gallons of gasoline/month.
According to AAA, gasoline is up 86 cents/gallon. For fifty gallons, that's $43 extra per month in gasoline costs compared to 2008.
That's one meal out for two people at a moderately upscale restaurant. It's one meal for a family of four at McDonald's -- not quite, but close. Throw in a couple of Starbucks coffee that week, and you will hit $43 (the McDonald's family of four dinner plus a couple of Starbucks.
Now, tell me again, that 86 cents more per gallon is hurting the economy.
I've got a much longer post on just this subject, and I think my argument is pretty solid. But politicians will demagogue it and airlines, grocery stores, and taxis will take advantage of it.
Again, I am not alone on this. President Obama, in his energy security speech just a week ago (when oil was $104 or thereabouts) reassured us that a $10 increase in the price of oil/barrel translates to only 25 cents/gallon at the pump. He understands the demagoguery and reassured us that cutting imports by one-third by 2021 will solve our problems.
This is what's scary, folks. If there's the amount of inflation in the next six months that Wal-Mart is predicting, then we will have something to be concerned about. The good news: The Chairman of the Federal Reserve, Mr Bernanke says "he" can stop it (inflation).
There is something in econ called the price elasticity of demand that is a major factor in pricing decisions on all goods and services.
ReplyDeleteWhat it basically postulates is that an increase/(decrease) of price is not immediate and/or linear. In other words price increases do not immediately lower demand and price decreases do not immediately increase demand. In markets where there is elasticity, prices can be increased /decreased and demand will not necerssarily move proportionally. All markets exhibit some amount of elasticity. For a lot of folks, 43$ a month is a big deal. Also, many are already at their drive minimum and dont have a way to buy less even if they want to.
If inflation is present, then price increases are mitigated because wages also increase in inflationary markets.
Can't argue with Econ 101.
ReplyDeleteWith regard to "already at their drive minimum" that is also correct and I recognize that. I have a long post on just this issue.
I've discussed this with a number of my egghead friends and while my initial thought on solving this was to simply increase production, I realized it still doesn't change the root of the problem.
ReplyDeleteThe long term solution would be tos use an alternative fuel source in the main mode of transportation or increase investment in mass transit.
While someone who needs to drive 1,000 miles per month may not be able to avoid using gasoline, if more people were using mass transit then the demand for the oil would be less.
It seems to be counter-productive when I see members of both political parties suggest we cut funding for public transportation. I'm lucky enough to live in an area of the country where mass transit is plentiful and relatively inexpensive for both the taxpayer and the consumer in fact it's cheaper for the tax-payer when you consider how heavily we subsidize drivers in this country.
Nobody knows the long term answer for certain of course but I'm curious what your answer would be.
Too long to discuss in "comment section."
ReplyDeleteThe solution is multi-faceted, but being anti-business and anti-Big Oil is not helpful.
Public transportation is part of the solution but it's got to be market driven, not policy driven.
So by that logic shouldn't we encourage the privatization of all roads? If drivers were required to pay for the services out of their own pocket instead of tax payers, conservative estimates suggest it would add up to more than an additional $3/gallon. Why is one form of policy driven transport ok but not the other?
ReplyDeleteIs being anti-government not helpful?
ReplyDeleteI am a very strong supporter/proponent of/for state government and local government. I am strongly against global government and Sharia law.
ReplyDelete