QH: Gas is too cheap

I recently filled up my 50 Litre gas tank for CAD$1.33 / Litre (that's US $3.83 / Gallon). I was thinking that, for all the complaining about higher gas prices, I don't drive less. That is to say, that the cost of gas (or, as my pilot-wife friend would correct me: "fuel") increasing has yet to have much of an effect on my purchasing.

Economists call this "elasticity." The price of gas @ $1.00 / L is still elastic: you can raise it, but I'll still buy more. Here is the basic supply/demand/cost curve that you've probably seen:


Economists love to draw these (it seemed that in my economics course a question wasn't complete without a graph). This particular graph shows a shift in the supply. In this case, the shift is "right-ward."

If however, you ignore supply & demand and instead look at Prices & Quantity; look at P2 as the "old price" of gasoline, and then look at P1 as the new, higher price. Notice what happens to Q (quantity) - it's less. This is basic economics.

But my point is that the Q, in our real-live scenario, hasn't yet decreased dramatically. For me it hasn't and, aside of some people I hear of buying smaller cars (yet I see many not-small cars still being driven), for most I don't think it has.

So, what's the solution if we want to emit fewer pollutants (and we know pollutants are tied to Q of gas burned which is pretty closely related to Q of gas purchased)? We increase Price (P) to reduce Quantity. Simple.

So I am began musing what sort of price change would inspire me to drive less. If going from $1.00 to $1.33 / L doesn't change the amount I drive, how much would the price have to increase.

What about 5x or 10x?

I think 5x would work for me. At $6/L - that'd be $300 to fill my tank - I'd re-evaluate many of my drives. I don't think I'd be the only one. Business mileage costs would go up and the business encouragement would be to carpool, take public transit, etc..

It's Simple Supply / Demand. We've move a slight ways on the curve and it makes a slight difference (link to more small & hybrid cars bought stat). We need to make a bigger shift to make bigger impact.

And to make the make impact that, Gas is just too cheap right now.

Update: many people disagree: http://www.fastcompany.com/big-idea/unless-gas-hits-10-gallon-americans-will-continue-buy-suvs-droves?partner=rss

Wednesday, May 28, 2008, 12:00 AM

tagged: charts, demandcurves, economics, gasprices, supplydemand

series: Quick Hits (38 other posts in this series)