Oil Dilemmas

by Elaine Schwartz    •    Mar 4, 2011    •    622 Views

The good news? We are driving more again–more miles than any year since 2007.

The bad news? We are driving more again–more miles than any year since 2007..

Here are the facts from a WSJ article.

With the recession and higher gas prices, mileage dropped by 3.6%.

But then, the recovery began, unemployment slightly decreased, and confidence built. The result? We drove more. More driving means more demand for gasoline that will contribute to escalating gas prices.

The solution? 3 possibilities.

1. Increase the federal gasoline tax. It has been 18.4 cents since 1993. A higher tax means less driving and less dependence on Middle East oil.

2. Release extra oil from U.S. emergency fuel reserves. Extra oil means cheaper gas, more driving and sustained recovery.

3. Do nothing.

The Economic Lesson

This is classic demand and supply. During 2007-2008, skyrocketing gas prices decreased quantity demanded, the recession (that began during December, 2007) shifted the demand curve to the left and equilibrium price dropped. Now, with demand reversing and Middle East concerns affecting (perceptions of) supply, the equilibrium gas price is rising.

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