My friend Ian writes:
Eventually, the American public reached a point where gas prices were at “crisis” levels. At this point people did something they tried to avoid for as long as possible. Changed their habits. People started driving less. Sales of trucks and SUVs fell. Sales of the Toyota Prius increased to the point of having to wait months to get one. People started using less electricity. They basically conserved. This was a shift in the behavior in an entire culture and when that particular culture uses 25% of the world’s oil, its change can have a massive impact. It also leads to today.
Gas prices have now dropped to under $2 a gallon around here and the impact has been an increase in demand right? Of course not. That would make this story both too simple and uninteresting. Demand has actually continued to drop. We’ve now reached the point where OPEC has decreased oil production once and is considering doing it a second time. It seems like most economists are quick to blame the recession but as this entry would imply, I do not think it is anywhere near that simple. The shift that I see is one that has had a deeper impact in how we do things as Americans. Many Americans want to see a change in how we get our power for both electricity and transportation. I guess the real question is when will we reach the price where things shift back the other way? When does it become cheap enough monetarily to overcome a change in will?
I see a few possible reasons why gasoline prices have remained low. I’m skeptical of both of them, but not outright opposed either.
I see a few possible reasons here.
1) Global Warming as an externality is finally impacting the consciousness of the American public and as a result there is some recognition (intuitive perhaps) of the collective action problem that is driving consumer choices. He mentioned as much.
2) Individuals are actually making rational choices. Previously they were stretched past their limit and relying on credit cards to pay for gasoline. They’re now saving even more money on gasoline then they did by cutting back, but with all other things remaining relatively static, they’re still feeling tight on money. Perhaps the collapse of the financial sector and the housing crisis have people convinced it’s in their short term self-interest to pay off their credit cards rather than traveling.
Any other ideas? Maybe it’s a bit of both?
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