Question about inflation?

Question

If supply & demand are what drive prices up or down, why are gas prices so high?

We had the same demand for gas in 1980 as we do now so.........why were the prices so low back then?

I know this seems like an elementary question but.......I never studied this stuff and I'd really like to know.

Thanks,

Primo

Answer 1

We have much more demand for gas today. Demand means the sum of "requests" for a product. You could argue that America has 100 million "demands" for movie tickets each weekend, but some people cannot afford $12 for a movie ticket ... so in fact only 20 million people actually buy the tickets.

China and India alone have about 2 billion people ... if America has 100 million people who are "middle class" you could argue that Asia -- with its transforming economy -- is producing a "middle class" USA every year or two. Demand for oil is skyrocketing. 40 years ago, most of the Earth was filled with very very poor people. In 15+ years, it's possible that there will be 10 wealthy Chinese or Indian people for every 1 wealthy American. And they'll want cars, plus trucks and ships to carry their bottled water and designer furniture.

That's the demand side. On the supply side, the Earth has a fixed amount of oil that cannot be replaced. Say it has 100 "units" of oil. From 1970-1990, maybe we used 10 units. From 1990-2000, maybe we used 10 units. From 2000 to 2005, maybe we used 10 units. From 2005 to 2008, another 10 units. Very smart traders and executives know these numbers cold and they see where this is going. We may find that, in 2015, we have fewer than 5 years of oil remaining! Who knows ... or maybe when oil is $25 a gallon, Exxon won't mind paying $500 billion drilling in the middle of the Pacific Ocean. Who knows.

Someone once explained supply and demand to me like this: if there was a plague and your community had 100 people and 50 doses of innoculation, how much would you pay for a dose. The answer is really, anything. And oil may come to that.

The short answer is ... every year, a h**l of a lot more people want to consume a lot of oil ... and every year, we use up more and more of a very fixed amount of oil.

Answer 2

Supply is WAY down. Far worse than 1980. Demand is up, way up since 1990. (how many SUVs and Hummers were on the road in 1980?) Here is what is driving prices up...

China is buying up oil, concrete, and steel.

Other countries are buying up oil and selling to the US

Environmental pressure is preventing domestic and offshore drilling

Disasters like Katrina destroyed refineries.

Clinton used up all oil reserves (for emergency use only) in order to keep oil prices down. Bush came in and began to recharge them--driving prices back up.

This is what I have discovered. There are no "conspiracies by big oil". The oil companies are getting more per gallon, yes, and they sock that money away because they know that economics in fuel can change on a dime. For example, President Bush giving the OK to drill offshore and Anwar will cause changes to occur. Oil companies have to get ready to finance the coming expenditures because a return is slow (3-5 years).

Answer 3

Go a little further back, and you'll realise that we're replaying the situation of about 1972. We've got a war no one wants that we can't get out of, an administration in the white house that is all for big business, an "energy crisis" and therefore inflation. And just look at the fashions that are coming back! Oh seventies!

I grew up in the 60's and 70's with rampant inflation from about 1972 and a lot of "shortages"--meat, coffee, sugar, even lettuce shortages! I remember when lettuce hit over a dollar a head! There were transport strikes and some of the independent truckers were attacked by union workers.

Later it was discovered that most of the "shortages" were fake--the middlemen were stockpiling in order to raise prices and increase panic-buying and demand.

If all the railroads hadn't been phased out, there would be better public transport and goods could be moved by rail without so much dependence on cars, trucks etc.

Economic history tends to repeat itself every 30 yrs or so.

Answer 4

This is an example of a monopoly.  You have one major supplier of a good, so they dictate the cost of it in a market.  Since oil is not a free entry/free exit market, OPEC can give any price they want.  They also control the supply.  If you decrease supply and the supply line moves to the left, the price increases as well.

It's a good question.  At least you're paying attention and asking, my friend.

Answer 5

Demand for gas is not the same as it were in the 1980s. A lot of developing countries like India and China are now requiring gas due to their booming economies.

Supply is not enough to keep up, and the only reason demand has slightly dropped in the States is because of the soaring prices.