Gas Price Elasticity

Topics: Petroleum, Supply and demand, Elasticity Pages: 4 (1361 words) Published: April 17, 2001
Gas Price Elasticity
The Energy Information Administration of the Department of Energy began tracking weekly gasoline prices in 1990 by means of a survey of 800 service stations around the country. The average retail price for unleaded gasoline posted its fourth record high during the week of June 12, 2000, increasing 5 cents a gallon to an average of $1.681. The price at the pump is higher than the same period last year by 56 cents and has risen 16.2 cents over the past month (Anonymous, 2000). How far will it rise? What will consumers do about the dramatic increases that are occurring with the arrival of each shipment? Price elasticity of demand would indicate that demand will fall as prices continue to rise, which in turn should result in a reduction of prices and a subsequent increase in demand. Such may prove to be the case, but the scenario is an unlikely one. Prices have increased all over the country, but price increases in the Midwest have been even more dramatic than in other areas. Across the region, prices are averaging $1.874 for a gallon of unleaded, but that same product is well over $2 a gallon in many of the cities of the Midwest. Higher grades average $2.003 across the region, marking the first time that average prices have been so high in a specific region of the country (Anonymous, 2000). There is so much concern over the rising prices that apparently are continuing to rise without abatement that the Federal Trade Commission (FTC) has "opened a formal investigation into soaring gasoline prices in some areas of the Midwest and will begin issuing subpoenas to oil companies by the end of the week" (Hebert, 2000; p. aol). Sen. Richard Durbin, D-Ill. believes that the oil companies will reduce prices right away once the subpoenas begin to appear, and the country's vice president has mentioned that collusion may be behind the oil companies' huge profits this year (Hebert, 2000). The summer driving season always brings higher prices in response to...

References: Anonymous (2000). Economics 52 - Using Price Elasticities to Forecast Prices. At
Anonymous (2000, June 19). Record Gasoline Prices for Fourth Week in a Row. Reuters at
Anonymous (2000). The Strategic Petroleum Reserve. US Department of Energy, Fossil Energy at
Brodrick, Cynthia E. (2000, February 15). How do gas costs affect consumers? At
Brodrick, Cynthia E. (2000a, February 15). The cost of a gallon of gas. At
Georgy, Michael (2000, June 20). OPEC Prepares To Raise Oil Exports Again. Reuters at
Hebert, H. Josef (2000, June 20). FTC Opens Gas Price Investigation. The Associated Press at
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