WHAT???? THREE DOLLARS A GALLON?

Like many of you I remember when gasoline was commonly available for twenty five cents a gallon. In fact I recall at one time, during a gas war, it was 18.9 cents. Of course that didn’t last very long. As kids we would go to the filling station and get a dollars worth and it would carry us for a week or more.

Then it began its inevitable climb. For me the next big note worthy price was a dollar a gallon. I remember stewing and fretting that we were being had by the big oil companies. I watched with amazement how it just suddenly came about and no one seemed to care much. So I came to grips with the price. It took several years to get to that price so I thought we would be there for a long time. We all seemed to come to terms with the price. After all, we were told “we’re running out of oil”.

Well guess what happened? You’re right, two dollars a gallon. It seemed to happen over night. I don’t remember how long it took, but it wasn’t very long. Even with the price however, there were long lines at filling stations because, after all “we’re running out of oil”. Like you, I lined up and like you, I paid the price. I remember thinking how much I missed the good old days of one dollar a gallon. When a station had gasoline even at the higher price, I was grateful. After all what else could I do?

Oh no! Three dollars a gallon? How did this happen? This last price rise has been meteoric. Oil is in excess of $100.00 a barrel. Speculators have driven up this commodity by wild eyed guessing and so far they have been right. But “we’re running out of oil” they say. The price has to rise. China and India are using much more of the available oil than ever before. There are more excuses than one could imagine. At any rate, according to the so-called experts, the price is headed even higher.

But, for us there is a light at the end of the tunnel. There is a rule in economics. The cure for high prices is high prices. What, you ask? How does that happen? I will use my own experience to illustrate this rule. I am spending about the same for gasoline today as I did a year ago. I have records of every dime I spend. Whether consciously or unconsciously, I have cut back on my usage. When I have chores I try to combine more stops in one trip. I cut back on unnecessary driving. I am apparently not alone. Across this country there has been a one percent reduction in demand in the past month. Most of the people I listen to believe this is just the tip of the iceberg.

Initially the oil companies will try to explain this away as an aberration. The speculators will hold out for the big summer driving season, but, like many others I think prices have reached an unsustainable high. When this occurs, they tumble.

More than just your driving is affected. Freight companies, airlines, farmers, and almost all commerce in America are affected. People will change their habits and subsequently their usage. One or two percent doesn’t sound like much, but it will shake the oil industry to their core. We are talking about billions of dollars here.

The State of Minnesota, in their wisdom, has passed a ten cent tax increase on gasoline in order to improve the roads and bridges. They will probably learn what New York City learned when they increased the tax on cigarettes. Usage went down to such a degree that they actually lost revenue.

Big oil and big government may not like the economics rule but it’s a lot like gravity. It doesn’t matter whether you like it or not, it is still the rule.

Ron Scarbro March 31, 2008