Friday, May 02, 2008

I'm "Happy" to pay more for Gas

Yesterday I bought gas, which was at a whopping $3.95 for premium.

In times like this, I think of Bill Clinton bragging about how he "loves to pay taxes." Well, um, sure. I mean, I get the point. If you're a for real leftist, then you're pretty much ipso facto for higher taxes, right? So at least Clinton's being consistent. Still, no one believes that he actually enjoys paying taxes, and that's because no one enjoys paying taxes. Generally when they sell higher taxes at election time, leftists aren't promising to pump up our self-esteem by giving us the opportunity to do this great fun thing every April, right? I think the argument generally goes that even though we mumble and groan about taxes, we should suck it up because we all get something out of it: a better education system, more healthcare, whatever rabbit it is they're promising to pull out of their hats with our hard-earned dosh that season.

The Libertarian version of Bill Clinton "loving to pay taxes" is, I think, "cheering" when prices on certain items rise. I'll be more honest than Clinton - the emotional side of me is never happy when gas prices are higher, because that's just that much less money in my already lint-filled gradstudent pockets. But the rational side of me is indeed happy to see gas prices rising, and that's because this is the only effective way I know to reduce US oil dependence.

Gas is one of those thing that economists say has an inelastic demand curve. Meaning: demand for it in the short term is relatively insensitive to changes in price. This is as opposed to something like shampoo, where if prices rise demand drops - the main reason it remains cheap. So gas is one of those things where the leftist stereotype of greedy capitalists living fat off of the sweat of the rest of us sort of kind of works out, for a little while. The oil companies can raise prices and line their pockets with impunity ... for a little while. But nothing on the market is ever free of the laws of supply and demand - not even in a socialist economy. (In a socialist economy you can pretend that supply and demand aren't functioning, but this always ends in shortages.) Not even things that show inelastic demand.

So what's the incentive for oil companies to keep their prices low? In the short term, nothing. But in the long term? EVERYTHING. If people can't live without oil, what they can do is find ways to use less of it. And once you've cleverly figured out how to do that, it's a rare thing that you'd go back to consuming at your old levels, even if prices went back down. Probably the easiest way to illustrate this is to imagine what effect spiking gas prices have on car buyers. $4/gallon probably isn't stopping the rich kids from buying Hummers, granted. But it is making commuters put a higher premium on gas mileage when they buy new cars. And once you've plunked down $15,000 for an efficient vehicle, you're hardly likely to go back to the dealer and trade your car in for a $30,000 guzzler if prices go back down! At best, you'd buy the $30,000 guzzler as an additional luxury car - for family trips and sunday drives and such - and continue to use the efficient one for your daily commutes - because why pay more for gas when you can pay less?

So the "inelasticity" curve is a double-edged sword. Yes, if you're a supplier of something with inelastic demand you can afford yourself the luxury of sharp price increases if you suddenly want more money. But you pay for it in the long run - because any measures people take to avoid buying your product are more or less permanent. Raise your prices to $4/gallon for a month, let them fall to $3/gallon the next month, and what you find is that you can't recover your old profit scale, because people are using a lot less of your stuff by that point.

For some examples of creative ways around gas use, there's the Treehugger Blog. The link goes to a cool article about some people who got 110 miles-to-the-gallon in a Prius without modifying it. All careful driving. Well, actually they're cheating a bit, of course, because they were in electric mode a good bit of that time and probably weren't figuring in the cost of generating power for the battery - but never mind. Whatever the real figure, it was quite high, and achieved largely though careful driving.

Oh, and be sure to check out the comments for some comedy. One commenter writes:

Heh... something to live up too for all of us Prius owners. :) I have trouble making 50 mpg in Seattle because of all the hills. I get 65 on the way to work (down hill) and like 45 on the way home (all up hill).

...erm, which means you average 55mpg, you moron. But then, we know from Kyoto that environmentalists, on average, aren't the sharpest set of tools in the shed. What I'm saying is that I'm glad gas prices are spiking because this gives INTELLIGENT people the incentive to start thinking outside the box on fuel consumption issues too. ;-)


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