Explaining gas prices
Date posted: October 19, 2011
Lots of folks like to talk about and get mad about gas prices. One big question is, What causes gas prices to rise? Some say it’s speculation and manipulation by gas producers. Others say it’s basic supply and demand of economics. Hear what N.C. State University economist Mike Walden has to say.
“Before I answer … this is obviously a topic — a prime topic for discussion you hear when gas prices are going up. You hear a lot of people talk about why. And usually, usually the answers go to … speculation, manipulation and perhaps even some conspiracy theories. And these … ideas do filter around, and … obviously our leaders tend to listen to them. So, periodically we have studies that are commissioned, particularly by the federal government, to try to get answers.
“And we just have had a new study issued by the Federal Trade Commission. They spent over a year looking at this topic, and … the conclusion is not going to sit well with folks who like to talk about speculation, manipulation. Because what the Federal Trade Commission concluded was that the basic reason why on trend we have seen an increase in gas and oil prices is due to just plain old economic supply and demand.
“The supply of oil and the supply of gas has not been increasing at rates that have kept up with increase in demand. The increase in demand is primarily coming from those emerging, very fast-growing economies in Asia and the Middle East.
“And when you have in any market — it can be the market for apples, it can be the market for ties — whenever you have demand increasing faster than supply, you’re going to have an increase in … price.
“Now, interestingly, one byproduct of the study that the commission looked at was to try to answer the question, Why does it appear that when … oil prices are going up, gas prices go up very rapidly, but when oil prices are coming down it takes a lot longer for gas prices to come down.
“The study did note that, and they — I mean, there is evidence for that, and what they concluded was it’s because when gas prices are going up and oil prices are going up, we become much more concerned about it. So we really put our shopping mode on, and we look for the lowest price. When they’re coming down, we’re not as motivated to do that — and we’re not as good a shopper, and that delays the reduction in gas prices.”
Category: Economic Perspective