The Rule Of Supply and Demand – Rules

Supply and demand is what drives prices on nearly everything. Low supply with higher demand equals higher prices, and higher supply with lower demand pushes prices lower. This process is what pushed gas prices down below $2 per gallon during the initial months of the pandemic when miles driven were far lower. But today, the hot topic is the historic high price of fuel – gas, diesel, propane, et al.

Countless people are complaining about the elevated price of gas, and for many including those with lower incomes, the high price hurts. The lofty price of fuel has spilled over into many other commodities and services such as groceries, shipping, and far more, resulting in a higher level of inflation. There are other factors playing into fuel prices and inflation such as supply lines that continue to recover from the interruptions by the pandemic, the war in Ukraine, and other reasons, all colliding at the same time to create these current conditions.

Has the high price of fuel resulted in less demand for fuel? The latest chart from the U.S. Energy Information Administration (EIA) reflects demand for gas has rebounded to as high as it was last year at this time when gas prices were more than a dollar less per gallon.

Yet, another chart from the EIA regarding the amount of fuel to sell is well below the 5-year average range.  Hence, there is less supply of fuel to meet the current demand, a key element in the higher price.

In addition, the price of a barrel of oil on a global scale is the highest it has been in the past 5 years, around $120 per barrel. Trimming Russian oil from the global market has tightened supplies, sending per barrel prices higher. Again, tight supply translates to higher prices. The last significantly high inflationary period was about 40 years ago early in the Reagan administration. Inflation was around 10.3 percent and interest rates were around 16.5 percent. The price of gas averaged close to $1.35 per gallon at that time. Using the inflation calculator shows that 1981 price of gas would be about $4.35 per gallon today.

All of this information does not make anyone more comfortable about the current price of fuel or rate of inflation, and where they are going in the near future. But for oil companies, there is far more comfort at the expense of those who use fuel. The authors of the Center for American Progress post wrote that, in the first quarter of 2022, these companies “brought in more than 300 percent more in profits than in the first quarter of 2021. That is a total of more than $35 billion in profits in just three months.”  And those heightened profits have continued this spring. The key to bringing down the price of fuel is to decrease demand and increase supply. Decreasing demand is on those who use fuel, a tough ask when the pandemic kept many at home. As summer nears, the number of cars on the road is approaching pre-pandemic levels, something all have noticed on our freeways and highways. Increasing supply is a task that is at hand around the world including the U.S.

North Sound Meteorologist Ted Buehner worked more than 40 years for the National Weather Service (NWS) from 1977 to 2018. He is now an Everett Post Media team member. Together with Everett Post Weather Minute Podcasts, he provides morning and afternoon commute traffic and weather updates on both KRKO and KXA Radio, and sports reporting on KRKO.