Is Anyone An Economist?


Can someone please explain to me how the price of gas has dropped so significantly? I can’t believe it’s just because people are driving less. So, why when gas prices were skyrocketing was it so difficult to control? I just don’t get it.

23 Comment

  • I have no idea, but check out what i saw when i was in richmond this past weekend: $2.83 for regular!

  • It is similar to housing prices. There was a bubble over the summer and now prices are coming down. Demand has a little to do with it, but it was more about speculation.

  • oil prices have dropped by at least 50% due to reduced demand. you would actually expect to see deeper cuts at the pump, but of course there is less incentive to reduce prices than there is to increase them until forced to by the competition.

  • We are entering a global recession. Demand will be much lower than expected, and the price has fallen accordingly.

  • my coworker said outside the beltway, near laurel its less than $3.00/gallon.

    i’m pleased. at least now i can afford to drive skyline drive to see the foilage.

  • Demand reduction, not just in the US, but also in the EU and developing nations. Expected demand, which drives the cost of futures and related pricing, is also plummeting. Also, refiners along the Gulf Coast resuming operations following hurricanes Ike and Gustav, allowing available inventories to increase.

  • I am not an economist, but I have many econ classes under my belt.

    Why did California energy prices drop after Enron stopped manipulating energy costs? There’s your answer.

  • Lots of reasons contribute to the drop in prices. Gas is priced at a seasonal high during the summer to reflect heightened travel patterns which increase consumption and profit margins; the seasons are changing. Speculation of oil commodities as a result of market forces, hurricanes, fortune cookies, etc typically drives up the prices; the market works in mysterious ways. Finally, the crumbling world economy has hit OPEC countries just like everywhere else and it is in their best interest to release more oil on to the world market in the hopes that lower prices brought on by a spike in supply may encourage drivers/govt’s and offset falling consumption trends.

  • Obama is ahead by 13 points in the polls, thats why gas prices are going down. Republicans are oil whores, Dems are oil comapnies worst enemies, its as simple as that

  • maybe its just an evil way to trick us into paying more for gas… they raise it from 1.75 to 3.00 and we all flip out, so they raise it to almost 4.00 and then slowly lower it back to 3.00 and we all go Hooray!

  • Seriously, it’s simple supply/demand. Demand is way down because the prices were too high. Add to that the down-turned economy and the end of the “summer driving season,” and of course prices are going to plummet.

  • Guys, demand did not cause the price to spike, ok? That’s a given, it’s NOT SUPPLY AND DEMAND it’s manipulation.

  • It’s the gas man yanking your chain.
    These prices will jump right back up after the elections.
    Mark my words.

  • Another key thing to think about is what economists call elasticity. The price of gas is down by about 1/4, but that doesn’t necessarily mean that the quantity of gas demanded is down a quarter (it’s not).

    The supply of gas is very inelastic (especially in the short run), which means that no matter how much demand for gas increases, very little additional gas can be produced. The demand for gas is more elastic in the long run, but in the short run the demand for gas is also highly inelastic because it takes time for people to buy smaller cars and adjust their travel/commuting habits.

    There are lots of individual factors affecting supply and demand here, many of which others have touched on. What you’re seeing now is that the peculiarities of this market mean that a relatively small change in the quantity of gasoline demanded can lead to a much larger swing in price, in a way that isn’t possible for most other goods.

    As for the speculation argument, I think there’s something to be said for the fact that speculation is what got us over the $4 mark for awhile, but I would still bet that much if not most of the change is because of small increases in supply (refining capacity coming back after hurricane season) coupled with larger decreases in demand (people finally starting to buy smaller cars and reducing their driving, along with changes in aggregate demand due to the slowing global economy). My best guess would be that we’ll see gas prices roughly where they are now or slightly higher over the next year or so, but that barring major supply issues we won’t see a return to $4+ gas for at least a year or two.

  • This big reduction in the last couple weeks has mostly to do with the mayhem on wall street. Since there are strong indicators of a giant recession, the price of oil weakens. Energy is one of the first things people will stop spending money on when they don’t have much — you can always use less heat or electricity or drive less and just sacrifice convenience or comfort. You still need to eat and pay rent though. So the price has plummeted in anticipation of reduced demand.

  • Just say Futures market.

  • Just like during the 2004 elections, the oil companies and oil producing countries are working to lower the prices. Bush was definitely their guy, and a Saudi Prince was quoted as saying that they increased production leading up to the U.S. elections in order to increase supply and lower prices. The prince said Bush was their guy and they knew that lower gas prices would help him. McCain is probably less of “their guy” but Obama has come out hard against the oil companies and foreign oil.

    Either way, the prices will surely go back up within 2 months after the election. Probably to a new high, just as they did shortly after the 2004 elections

  • Just J, Otis PL. and Anon 3:06pm are all dead on! If any of you remember the fall of 2004, the price of gas just went down and down until Election Day. As soon as Bush had secured a second term, the prices crept right back up to their previous highs. Consider it the oil industry showing their support for the GOP!

  • “Guys, demand did not cause the price to spike, ok? That’s a given, it’s NOT SUPPLY AND DEMAND it’s manipulation.”

    I would wager that the soaring level of fossil fuel consumption in India, China, and Brazil
    does actually have a lot to do with it. And read Krugman’s blog posts on speculation, he makes the point that if speculation is really happening, someone has to be holding that fuel off the market. Yet petroleum inventories are not growing in a way that would indicate massive speculation.

    I think it’s clear that demand has recently shifted in as people brace for a recession and have also made some medium-run adjustments to previous high prices, e.g. buying a more efficient car instead of an SUV.

    Finally, on summer gas: summer gas is often more expensive because blenders have to create less volatile blends for higher temperatures, the additives for which are more expensive. For instance, winter blends often contain a lot of butane as a blending agent, which is relatively cheap but also very volatile. Standards for summer blends also differ across regions due to diverse temperatures and air quality laws. Thus, summer gas is more expensive and less fungible than regular gas, and price spikes are thus more likely to occur as supply is more geographically restricted:

  • the wisdom is strong on this thread!

    futures market manipulation, Check!
    recession and demand destruction, Check!
    but wait, gas prices are inelastic, Check!
    so really, its futures market manipulation, Check!

    do a little research on oil futures clearing houses, goldman sachs, and veritable monopolies on oil contracts….

  • I believe Lee on this one, PoP.

    Although I’d add that usually commodities like oil turn hot when the stock market drops, but in this case, reduced demand (summer ending+less spending money+consumer alternatives) means that speculators have turned away from it as a reliably safe investment. Keep in mind that a LOT of investment fled to oil several months ago when usually super-safe mortgage debt was known as unreliable. It was the flight to commodities that helped push oil above $4.

  • Hrm, obviously someone has not been following the markets lately. Oil fell to below $75/barrel today. It had peaked at $147, so it has fallen nearly half since its’ peak. The last time oil was $75, gas was less than $2.70/gallon, so in reality it’s still VERY overpriced, and the price has fallen very slowly.

  • Mai: Feh, when I was in Richmond two days ago it was $2.52.

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