I’ve been driving a ton recently. This is quite unusual for me these days. My office is in my neighborhood, and I usually walk to work. Living that close to work not only is convenient, but I save serious money on fuel. I have been somewhat immune to the recent rise in fuel prices. But when I was putting in my 6th hour of driving (for the week) yesterday, my mind started to wonder. I decided to use my knowledge of economics to track the path of particular industries as a related to increases in oil prices. Yeah, I’m a hell of a lot of fun to be around. Anyway, I came up with this following scenario. I thought it was interesting, so here you go:
- Oil is expensive for lots of political reasons.
- Therefore jetfuel prices are high
- Therefore airlines profit margins shrink
- Therefore some airlines go out of business
- Therefore other airlines have less competition
- Therefore they raise prices
- Therefore less people fly
- Therefore less people vacation
- Therefore people are more stressed
- And tourist destination cities lose money
- Therefore businesses in those cities lose money
- Therefore they lay off their already stressed out workers
- Therefore people have less money to live on
- Therefore they don’t even drive due to high gas prices
- Therefore fuel demand decreases
- Therefore fuel prices fall
- Therefore jetfuel prices fall
- Therefore airline ticket prices will fall
- Therefore people will be able to afford tickets
- Therefore airlines will have more flights
- Therefore they will hire more people
- Therefore they will raise ticket prices
I literally went through this exercise for an hour. My point? I was hoping that you could tell ME my point. Kidding. My point is that this is the natural course of supply and demand. It is long and involved. If anyone (government) steps in during the process, then the entire process gets thrown off its natural path. Supply and demand are the ultimate economic forces. They will eventually balance out. I was against Cash for Clunkers. I was against the New Homebuyer Tax Credit. And I’m against opening up the oil reserves. Tinkering with demand always jacks up the economy worse.
What do you think?
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.
3 thoughts on “Pete the Planner’s Supply and Demand Rube Goldberg”
If we do our own drilling and use our reserves, wouldn’t that keep the prices of oil low, helping the economy grow with lower prices and more people working? I understand supply and demand, but oil is clearly crucial for our day to day lives from necessities to luxuries.
@DG: Even if we were to fully tap our reserves, it would only supply a very small portion of our overall petroleum usage.
Here is the fun part, Pete: The government is currently subsidizing the development of alternatives to oil which sounds like a good thing because we need to become less dependent on it. HOWEVER! It spends far more money subsidizing oil which runs exactly counter to what is supposed to be happening: enticing people to move to alternative energy sources.
So which is it? Do you want us to not use oil or do you want to make oil cheap and affordable? What a money suck.
@Andy: Howdy from Texas!
But what you are saying about our oil supply is just not true.
I have many friends and clients in the oil industry. There is enough oil in WEST Texas to support our country. Just Texas alone produces more oil than the country of Venezuela (annually). And that country is a player in the global oil game. Let’s not forget our off shore drilling efforts and all of the drilling we dont know about..(wink). In fact, we are a huge exporter of petroleum because of our refineries…the best in the world. We have enough natural gas and coal to heat our country for many many years to come. The problem with alternatives is not the amount, its the POWER they lack in. The only alternatives that make sense are NUCLEAR and Natural Gas… however, the first one could be a touchy subject.
@DG: Using our own would not necessarily drive down prices, there are hundreds of other factors involved, I believe Pete touches on these factors often. We dont use more of our own because we dont have to. It’s Inconvenient, but its the TRUTH-Pun intended. (Is that a pun?) Also, the amount of damage drilling does is not worth it right now.
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