Supply, Demand, and Gasoline Prices

What Happens when the Oil Supply Collapses?

We generally accept that prices rise and fall. A comparison of gas prices just before hurricane Katrina to one year earlier reveals a difference of about a half dollar. Modern economics tells us price is directly proportional to demand and inversely proportional to supply. They give the reason as the need to burn off inventory or produce more when needed. This is one of the first things economics students learn, and can be found in any basic textbook.

A closer look at this situation reveals a problem never addressed, at least not completely. The oil supply is a natural resource, and therefore limited. As we exhaust more oil reserves, those same reserves become scarcer. The result will be that gasoline prices will reach the point where only the rich will be able to afford it. Many realize this favors the rich; others seek to improve production to make the product more available. The problem is that if oil production increases, the natural reserve will exhaust sooner.

Here lies the problem. If the price of gasoline goes too high, those families who need a job will become unable to find one because their gas tanks will remain near empty. Supply drops and prices come down. Suddenly, everyone trying to get a job goes out almost all at once. Not only do prices skyrocket even worse, but frustration sets in, leading to unbelievable social problems. A similar effect occurred after Katrina, when the gasoline used by those fleeing the area increased demand, combining with the damaged production.

Economists do not question the concept of basing price on supply and demand, and they have one indisputable point. In order to produce enough to satisfy demand, the funding of additional supplies, equipment, and labor may require a price increase. At the same time, the favoring-the-rich theory seems to lack a sound opposing argument.