WASHINGTON -- The awesome power of supply and demand was at work last week as gasoline use fell and inventories rose -- producing a double-whammy that eased market prices for gas and oil.
Americans learned about supply and demand in high school economics (or at least they should have), but that lesson gets lost in all the anger and political demagoguery that usually follow higher fuel prices.
When prices reach levels that cut into consumer incomes, people tend to use less of it. The result is less demand, supplies rise and prices come down. This is true of just about every commodity, from oil to coffee beans.
Several weeks ago, I reported that if oil prices continued to climb, gas prices would keep rising until consumers began cutting back, which, in turn, would result in lower prices -- proving the free market works.
Last week, the government reported that gasoline demand has been flat for a month, while fuel refineries had been scrambling to boost production to catch up with higher gasoline use.
The Energy Department reported that over the past four weeks, average daily gasoline demand in the United States was little higher than a year ago.
Word that U.S. demand was flat sent a signal to the oil markets last week that told them, "Wait a minute, gas isn't being consumed in the U.S. as fast as we projected." That signaled lower demand for oil, and that sent oil prices down by more than $2 a barrel by midweek, and lower in the days that followed.
"The decline in crude (oil) followed a sharp drop in gasoline futures, which sank more than 9 cents to $2.08 a gallon," the Associated Press reported. This is not the pump price, which, when taxes and other costs are added on, averaged $2.92 a gallon last week.
What few consumers know is that oil and gas commodities are traded just like stocks on the open market. Prices are bid on the basis of demand that include long-term forecasts for worldwide demand for oil.
But prices bid are based on other factors, like fear, and lately fear has ruled the oil-trading business. Fear that Iran, a major exporter, will cut its supply, unrest in Nigeria, or even fears of the coming hurricane season shutting down oil rigs in the Gulf of Mexico.
All of this has stirred fears here about what impact all of this will have on our own economy. Last year, we watched the price of crude climb to $40 a barrel, then to $50 and then $60 and over, as economic forecasters predicted that oil would drive up inflation, sandbag the U.S. economy's growth and send gas prices on a never-ending spiral.
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