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A Tank of Gas

Apr 27, 2011 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Environment, Households, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 296 Views    No Comments

A tank of gas is not just a tank of gas.

Isn’t it a spending decision? The national average for a gallon of regular is close to $3.88 and higher in California. July 2008 was the last time we dealt with 4 dollar gas. One economist estimated that 4 dollar gas cuts our discretionary income by 5%. That means less to spend on meals, vacations, clothing, and furniture.

Also, a tank of gas represents much more than crude oil. If you imagined the price of gas as a pie, then a 68% slice is for the oil. Add in 12% for taxes, 7% for marketing and distribution, 13% for refining and you get the 4 dollar total.

What else can an expensive tank of gas mean? With higher gas prices, AAA emergency gas deliveries to stranded motorists are soaring. Higher gas prices could lead to .5% less GDP growth. And, President Obama’s popularity is affected by gas prices.

The U.S. Energy Information Administration website has great stats about any gas fact you need. Also, you might enjoy looking at this Washington Post poll about how high gas prices have to go before we drive less.

The Economic Lesson

Gas provides perfect examples for econ vocabulary. With the price of a gallon of regular gas close to $4.00, the opportunity cost of running on empty has diminished. 4.00 gas also affects our discretionary spending. And, of course, it all starts with elasticity. At what price will we buy less gas? Many have said that $5.00 is the point at which our inelastic demand becomes elastic.

 

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