This is economics 101 when it comes to the law of supply and demand. You don't need to be a genius to understand the simple principle. When something is in short supply, the price will go up. Why do some people repeatedly call for price control in trying to solve a supply problem? Whether it is gasoline or apartments in NYC, price control does not work.

To illustrate this point, let's start with a hypothetical.
Suppose you are granted a wish to solve world hunger and you must choose between 2 options. One is to give every hungry person a million dollars and the other is to give them a year supply of imperishable food products. At first, you might think who wouldn't want one million dollars. However, if you understand the economics of supply and demand, the better choice would be to choose the 2nd option. Why? The answer is simple. By giving people money, you have done nothing to affect the supply of food. What would happen is that the price of available food will go up to compensate for the extra money flowing around. It would be like instant inflation. One would need a wheel barrel of money to pay for a loaf of bread. On the other hand, if you give people food items, you have in effect, increased the supply. Not only will food be available, it will drive down the cost of food all over. The extra supply, through the hidden hand of the free market system, will force the price of food to drop.

Now, let's take a closer look at our current problem with rapid rising gasoline prices. What does common sense tell us about the long term solution? Will price fixing by government solve this problem? Not likely. As our energy use increases, the demand will go up. The price will go up unless the supply can be increased to offset the demand.
In the short term, the only thing that will help reduce the energy cost is to conserve our usage. The long term fix is to increase our oil production and refinery capability or come up with an alternative energy source.

That however, does not explain the price spikes of gasoline prices. In practice, our gasoline does not quite fit the supply and demand forces of a free market system. The reason is we don't have a free market when it comes to gasoline. The oil industry is controlled by a handful of giant conglomerate. These companies have a literal monopoly on the supply, production, refinery and distribution of gasoline. In conjunction with our government, they prevent new competition from entering the industry. With all kinds of governmental regulations and environmental constraints, few people if any can start up a new oil company to compete with Exxon. Exxon can charge a premium for gasoline and not worry about some other company undercutting their prices. We as consumers have only one recourse. We can make our displeasure known by hurting them in the pocketbook. By not buying gas from Exxon/Mobil, we can send them a message. Don't take advantage of us or we can collectively hurt you. We may not be able to drive them out of business but we can certainly put a black eye on their reputation.

Table of Content
Previous Chapter
Next Chapter