Wednesday, June 25, 2008

Gas Prices and Paintings

This is interesting:  It seems that Sadie and Pyper Vance are exercising their First Amendment right to protest by picketing in downtown Salt Lake City to draw attention to escalating gas prices.

 Kudos to their parents for setting an example by getting involved in current issues.   They should be proud that their daughters are learning civil involvement at that age.  Furthermore, though two girls by themselves may not qualify as a huge movement, their parents did not tell them that.  Never tell a child that they are incapable of triggering change.

 But, that got me thinking about this whole gas thing.  Everywhere I turn, I hear people complain about the gas prices.  It appears that, as a nation, we are missing the point.  Somewhere along the way, we either slept through or entirely skipped a basic economics lesson—the effect of supply and demand on prices.

 At its most basic, the price of a commodity is set by some simple forces—how much are you willing to pay for what I have, and how much am I willing to receive for it.  Let’s say I have a painting, which you want to buy.  In my mind, I want to sell it for about $200.  You, on the other hand want to buy it for around $100.  If we are the only two people in the equation, the price will shift somewhere between the $100 and $200 until we both get to a price where we are comfortable with the deal.  If either of us attempts to walk away from the deal, the other will have to adjust if they want to complete the deal.

 Now, let’s add one other person who is interested in the painting.  Now, the balance shifts in my favor, because there is only one painting (supply is limited) but two potential buyers (more demand than supply).   Now, if you walk away, I can still deal with the other potential buyer, so the price stays high, in my favor.  Let’s go one step further and say that four people now appear with paintings that are identical to the one I have.  Now the balance shifts in favor of the buyers.  There is now more supply (five paintings) than demand (two buyers).  Now, I have to bargain to be one of the lowest two prices if I want to sell.  Overly simplistic, I know, but I’m not trying to write an economics text book.

 Let’s apply these principles to gas prices.  For decades, we have demanded fuel for all of our toys and castles.  Don’t get me wrong, I love toys, and would love to live in a castle.  But those toys require fuel to work, and the castle is powered by fuel.  So, the bigger the toy or the bigger the castle, the more fuel is needed to make everything hum (or roar, as the case may be).  We have been constantly increasing our demand for fuel.  To return to my painting example, we have many buyers who want the painting.

 On the other hand, due to various environmental and governmental factors, we have done close to nothing to increase our own fuel supply.  We have increased our demand, while shrinking our supply.  We have been slow to develop new fuel sources, we have refused to drill into our own oil deposits, but have instead placed our supply needs in the hands of other countries that have little or no interest in our well being.  Again, in my example, this means that although there are many buyers that want the paintings, there are still few paintings. 

 The balance will swing in our favor only when there is more fuel available than what we are using.  We complain about oil companies making a bazillion dollars in profit.  Why shouldn’t they?  We have in effect given them a monopoly on our fuel supplies.  They have a strong grip on our wallets because there is no one else we can bargain with—and that’s our own fault.  

Complain all you want, but until we either decrease what we use, or increase our own supply, we will be at the mercy of the oil producing nations.  They know that, but it seems that all we know to do is complain and picket.  That’s admirable and great when you are a young citizen, but as adult consumers, we ought to know better.

1 comment:

Anthony Bass said...

the value of a dollar has added new dynamic to the equation! would you not say so?