Supply, demand and gas prices

Just as an FYI about my earlier post on gas prices — from AAA’s Fuel Gauge Report: Prices are falling fast.

AAA Mid-Atlantic says the dropoff is due to a falloff in demand:

Gasoline consumption is down again, according to the U.S. Department of Energy. The rolling four-week average is nearly 3% below the same time last year. Demand has fallen every month from March through September and vehicle-miles-traveled have dropped for 11 straight months, falling 4.4% in September.

The drop in price is straight out of Econ 101 — it is about supply and demand. The failihng economy

If there is more supply than demand, then prices fall. The GOP — more specifically, the McCain campaign and the Bush administration — view the supply side as the more important one, with the idea being to increase the supply of crude oil. More crude oil, which in turn means more gasoline for drivers, would then force prices down.

In theory, this makes sense. In practice, it ignores limitations on supply — crude oil is a finite resource that is becoming increasingly expensive to obtain — and burgeoning demand. As anyone who drives on New Jersey’s crowded highways knows, there is no shortage of drivers.

As the last six months have shown, the key is to reduce demand. The most current shrinkage in demand, however, is tied to the economy, with people cutting ack on their driving to save money. I would hope this would lead to a permanent change in driving habits, but we all know that’s unlikely.

The reality is that, as gas prices fall (or the economy improves), people will start driving more and more and prices will level and start to rise. If we want to do something about gas prices — and, more importantly, about the damage that fossil fuels do to the environment — we need to do more than talk about reducing demand. We need to boost fuel economy standards and create alternative fuel sources, while also encouraging consumers to opt for more fuel-efficient cars (hybrids, plug-ins, etc.) through tax incentives.

While conservatives are pointing to the economic meltdown as a reason to scrap some of President-elect Barack Obama’s environmental plans (in favor of, yes, you guessed it, tax cuts), the reality is that the kind of changes in thinking his plans would entail (including research and development into fuel-efficiency and new fuels) fit nicely with the kind of stimulus needed to get things going.