Welcome to the second installment of our new series! We’ve rounded up experts in the fields of economics and personal finance to answer common questions young people have about their money. For our second column, we’ve asked an economics expert for his insight on the high prices we’re paying at the gas pump. Got a question you’d like to see addressed in this space? Shoot us an email at email@example.com.
Today’s expert is Mark C. Schug, a professor emeritus at the University of Wisconsin-Milwaukee and a national consultant on economic and financial education. The high price of a gas is a common complaint, but who’s responsible for those prices? And is that gas station boycott you heard about in a forwarded email really going to help matters?
- Your local gas station isn’t responsible for rising gas prices. Most economists agree that gas prices are set by the laws of demand and supply. Local gas stations are “price takers” and not ”price makers”—which means they’re paying the same high price you are. In fact, most retailers are only earning 1 to 3 cents in profit for each gallon sold.
- High gas prices are painful for your wallet, but they do serve an important purpose. High gas prices are signals to oil producers that demand exceeds supply—which means they need to find more oil and come up new technologies. Some oil companies are using new technologies in the old oil fields of the Texas Permian Basin; North Dakotans are aggressively developing oil deposits in the Bakken formation. Such new oil supplies may eventually bring oil prices back down.
- Boycotting gas stations will not reduce the price of gas. Local gas stations are merely reflecting changes in the market—they have no more say over the price of gas that your local grocer or family doctor. What will reduce the price of gas is an increase in supply, which is why some elected representatives have discussed expanding supply by obtaining oil off the coast of Alaska, California, and Florida.