The "cost" of supply and demand

24 May 2007

Congress stepped up to the plate to tackle the issue: "Are the gas companies shafting us?"  With prices at an all-time high and reports of CEOs of oil companies making hundreds of thousands, it’s a natural question.  However, the question neglects a very important fact: when demand goes up, so must cost.
In today’s editorial, I’ll discuss why prices are so high, why it’s everyone’s fault, and why not purchasing gas on one day can does nothing to the oil company and only ends up hurting the community.Consider the crudely drawn image below:

As you can see, when the price is low, Consumers want to buy like crazy!  Inversely, when prices are low, Suppliers aren’t too happy to sell.  Obviously, this is overly simplified, but you get the picture.  Now, consider the opposite.  When demand goes up, Suppliers must raise prices or their supply will run out.

Oil is an interesting commodity.  Oil cannot be "renewed" — meaning that once it is gone, it is gone.  Oil reserves are slowly decreasing (not at an alarming rate that many news reporters will have to believe).  However, the consumption of oil (read Demand) has increased.  Oil isn’t created "out of thin air", prices MUST go up.  Yes, read that again because so many people are blaming the gas companies when it is simple economics.

The price for oil must follow the red line since it is a limited commodity.  The new equilibrium price is shown by the orange line:


So why are so many people complaining?  Personally, I think it’s because all they see is the sticker price.  I find it ironic that the same people who complain about gas prices want more "biofuels" and hydrogen cars.  Many of these alternatives will cost the same, if not more, than gasoline.  (And the environmental savings is horrible.  More on alternative fuels at a future editorial.)

People are reacting saying that if everyone were to boycott buying gasoline for one day, it would A) increase supply, B) Send a message to the companies that we’re not going to take it, C) save the cheerleader, thus saving the world, D) Take money out of CEOs pockets.  (These are the reasons I’ve seen to date.)

All of these are simply ill-founded, for three main reasons:

  1. Once the gasoline reaches the station, the gas has already been paid for.  Buy not purchasing gas on one day, it hits the local people that own the station, not Big Oil.
  2. Not buying gas on one day doesn’t change demand.  It only changes on which day it is purchased.  We must collectively DECREASE DEMAND.  This means oil and oil by-products (e.g. plastic cups, wrappers, soap, shampoos, etc.)
  3. Again, not going to a particular company doesn’t change demand.  We are simply purchasing from someone else.  Remember #1: Once the gasoline reaches the station, the gas has already been paid for.
  4. Many of these e-mails, facebook groups, MySpace profiles, or whatever are done to trick you into sending it to all your friends.  Remember chain letters?
Consider the list below of someways to help you lower you gas consumption.  They make common sense because, well, they are.
  • Don’t drive to work.  Consider public transportation, walking, biking, etc.
  • Only use your car if you need to.  Public transportation decreases consumption by spreading it over multiple people.
  • Convernserve as much energy as possible.  Use fans instead of air conditioners.  Open windows to circulate the air better.
  • Drink water.  Other drinks must be manufactured and shipped, using gasoline.  Drinking water minimizes your gasoline "foot print."

(Note: Graphs on this post are released to the public domain.)

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 | Posted by mike | Categories: Editorial |