Economics Commentary - Gas Prices

Economic recovery is being shown and demand and supply for gasoline is predicted to increase in the future but none of this will stop the rise in price of oil. Demand is the willingness and ability of a consumer to buy a good or a service over a period of time at any given prices. On the other hand, supply is the willingness and ability of producers to supply good and services at a number of different prices. An increase in demand can push up prices which can be seen below in Fig. 10.1.

Fig. 10.1

Another way to show the increase in price is a decrease in supply. This is shown in Fig. 10.2.

Fig. 10.2

Overall this will cause many long and short term affects. It is predicted that prices will continue to go up. The United States will depend on foreign exchange from the countries in the Middle East who have oil. This might be charged at high prices and will be in demand with the other countries that need it. The US is a huge importer of oil, the purchasing power of it will greatly be reduced. This will weaken the US’ economy and will cause a balance of trade deficit. But this will not affect producers as demand for oil is price inelastic, however, it will cost the many importers of oil. These are the effects in the short term.

But if these prices continue to rise, people will look for alternatives solutions e.g. hybrid cars. Consumers will use more of their income to purchase the oil and will have less to spend. This will decrease demand for other goods and services which in turn would decrease economic growth. This will start a chain of negative consequences which could very well drive the country into a recession. Also, oil is a vital component in the production of many other goods and services, so this will decrease production of these goods.

However, not all will be completely bad. This price increase should encourage the US to look for other sources of energy and fuel. Oil will eventually run out as it is a scarce resource so it is best to look for alternative sources as soon as possible. If this is possible, then it will solve not only the US’ problems, but also a global problem.