Critique of Rising Gas Prices

The previous blog discussed the rise of gas prices in the past few weeks. This article discussed brought up a few issues that I would have to disagree with. The main points I disagree with in the blog and article are that the expectations that the Federal Reserve may increase the money supply is influencing the increase in gas prices, that the demand for gas in weak, and that gas is not considered inelastic.

I find it a stretch to contribute a rise in gas prices to an expectation that the money supply is going to be increased. I can understand why the prices may rise if the Federal Reserve did in fact decide to increase the money supply but I don’t believe that purely anticipation of the event is the cause for the rise in prices. Gas prices are constantly changing for a variety of reasons. We all have seen how gas stations will raise prices during high travel times, like Thanksgiving or Christmas, just to increase their profit margin. This is just one example of a reason gas prices can raise but a little over a 5 cent increase in price is not a large enough to assume that prices are raising because of a possible increase in the money supply.

Secondly, I strongly disagree that the demand for gasoline is weak and the supply is strong. If this was true there would not be such a push for new ways of transportation that do not rely on gasoline. America alone is very dependent upon oil and other countries, like China, are also increasing their consumption, raising the demand even more. Hurricane Katrina served as an example of how dependent we are on gasoline. When people heard that gas may be scarce due to the hurricane hitting the oil rigs consumers fled to gas stations making prices skyrocket. People panicked at the idea of not having enough gasoline to get them through their daily activities.

Lastly, I believe that gasoline is inelastic. Consumers may have been able to slightly reduce their consumption of gasoline during the recession by carpooling or using mass transportation but the demand can only be reduced so much. Everyone has places that they are expected to be at like work or school and they depend on gasoline in their cars to get them there. Consumers continue to buy gas regardless of the fluctuations in price. No one is going to tell their boss that they can’t be at work today because gasoline is too expensive.

Overall, I feel the article made broad assumptions about the rise in prices with disregard to many other influences. Americans are very dependent upon gas for their daily life making the demand for this product strong. The strong demand that is not affected by price also makes gasoline inelastic.