Wednesday, August 27, 2008
Gas Prices, Tipping Points, and Demand Destruction
The Valero station above is where I usually fill up, since most of the time it has the lowest prices in the area. Gas prices peaked here a couple of months ago at $3.939, so to see them drop to $3.399 this week was a relief. Last year, when gas prices peaked here at around $3.159, I remember how high that seemed at the time, and that I tried to drive less. Now, after paying $3.939 per gallon two months ago, paying $3.399 seems like a deal. I don't think about gas prices much now when I decide whether or not to drive somewhere.
Thinking about this, I recalled recent columns claiming that $4 per gallon gas was the tipping point into demand destruction, so the corresponding oil price (~$149 per barrel) was the peak (some columnists went further, and claimed that oil was on its way back to $70 or less per barrel). A problem with the tipping point concept, as my reaction above demonstrates, is that the mind adjusts, so tipping points are a moving target. $4 gas may have been the tipping point that caused Americans to drive less this year, but next year that tipping point might be $4.30, and the next year $4.50, and so on.
That's just us, of course. The rest of the world has plenty of drivers, and many of them in developing and oil-producing countries have gasoline subsidies that insulate them from the effects of higher oil prices.