by Hal Lillywhite

Created on: June 22, 2007

Gasoline price is still primarily set by the law of supply and demand. In a tight market such as we have now, the supplier has the advantage and can manipulate things to drive prices up. That's why it's called a seller's market. When supply significantly exceeds demand, and in the absence of collusion, sellers are forced to compete which drives prices down. In fact if supply is high collusion among sellers becomes more difficult, all it takes is one supplier cutting prices to grab market share and everybody is forced to do the same. The problem at present is that demand is high, allowing suppliers to charge more.

Several factors have conspired to cause demand to equal or exceed demand. Probably the most important of these is the economic development in China and India. Those are the two most populous countries in the world and per capita gas consumption there is increasing. That many people can consume a tremendous amount of oil products, which they are doing. This has drastically increased demand, a situation not likely to change any time soon except by getting worse.

At the same time U.S. refineries are overloaded with no new refineries having built for about 20 years (though some have been modernized and expanded). Some refineries were even temporarily closed this last spring. As a result, supply of gasoline in particular is limited. You may have noticed that the price of diesel actually dropped while the price of gas was rising. Diesel is less refined than gasoline, which means that low refinery capacity makes oil available to be made into diesel.

That largely explains why gas prices have been so high.

Of course what most people really want to know is how to drive the price of gas back down. With an understanding of the above causes we can determine how to do that, but it won't be easy. We must either increase supply or reduce demand. Increasing supply will take time but we can do some things to reduce demand immediately:

1. Keep your car tuned up and the tires properly inflated so it gets better mileage.

2. Try walking or biking for short trips. Not only will that save gas but it is healthy for you and your car. Short trips are hard on engines.

3. Consider car pooling, buses, light rail etc. if available. However
those are not always fuel savers since sometimes you have to go out of
your way to use them, and sometimes the public transit requires a
circuitous route to get where you're going.

4. Slowing down does save gas. However so does driving smoothly. When
safety

• 1
• 2
• Next Page >>