Gas prices have always been an issue, especially this past month. Lately, gas prices have been on the rise again, and they have been at their all time highest. Analysts say prices are going to stay pretty high for a little. But why is this happening? Its a simple problem of supply and demand.
In light of the recent disasters, such as the Japan earthquake and the turmoil in the Middle East, the economy has not been the same. With the national average of gas rising to $3.60, up three cents from a week ago and eighty cents from what it was a year ago, people want to understand why more of there money is being drained. The oil-producing Middle East, which has gone through a lot recently, is in no position to be supplying oil. The main issue focused on here is the inequality of supply and demand. The supply is not changing, but the demand is on the rise. Supply and demand interact with each other to produce an equilibrium price and quantity, or a market equilibrium. However, this equilibrium is not happening and statistics tell us that if the demand rises, then so will the price.
National energy practice leader at BDO says that both the crises happening at the moment are to blame for this. He says, “The Japanese economy is going to need its electric power from oil-based sources as a backup to their nuclear problems. Their demand for oil has already increased.” Increase in demand isn’t just happening in Libya, its happening everywhere. Another factor increasing the demand has been the increased production from industrialized and developing nations, another contributor to the sharp increase in gas prices. Two of the main countries that are increasing the demand of oil are India and China, in fact China is looking to increase their demand for oil about 6.5 percent this year. The future of the supply and demand of oil is a concern because of the emerging economies eating up all this oil.
As price increases, the consumption seems to increase also. This doesn’t make sense in relation to the rules of price elasticity. Price elasticity states that if the price of a commodity rises, then the demand will fall. This can be blamed on the increase consumption of mainly countries in Asia, since America’s demand has not risen that much. In this situation, the supply is what is determining the price because there is really no substitute for gas at this point making gas inelastic because it is less than one. People must continue to buy gas, the price will continue to rise though because there is still the same supply and more and more demand. This is probably in hopes of trying to decrease the demand for oil.
The hope is that by the end of summer, the huge increase in price will allow for a slight decrease in demand for oil from Europe, the U.S and possibly China. This in turn will likely help the price of oil to go back down and the supply and demand to come closer to equilibrium.
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