2008 Woodie Awards
Economics for Everyone
Student Loans: Bringin' a world of Pain
Stephen Zill
Issue date: 5/27/08 Section: Features
According to the renowned 19th century historian and curmudgeon Thomas Carlyle, "Teach a parrot the terms 'supply and demand' and you've got an economist."
Needless to say, there is much more to the "dismal science" of economics than just supply and demand, but it's true that economists often come off sounding like parrots by citing those two factors to the point of trivialization. This brings us to the subject of this week's column: Just what the heck is going on with price of gasoline these days?
As far as demand goes, while there are signs that U.S. consumers are finally cutting back on gas consumption, we still suck up an enormous amount of the world'ssupply of oil (over 2 billion tons per year).
In the past, this wasn't such a big deal, but now we are competing with booming economies like China and India.
And on the supply side, there is only so much gasoline that can be refined in the short term, so yes, "supply constraints" play a role here, too. Another tricky issue is that gasoline is what economists describe as being "highly price inelastic," meaning that consumers are usually unresponsive to increases in price.
But, of course, it isn't as if we just started hogging the world's petrol, and its not like China and India just started growing economically, so why have gas prices suddenly spiked now?
There are at least three other factors at play. First, some are placing the blame squarely on the shoulders of speculators who - as a hedge against inflation, the falling dollar and further price increases - have continued to buy up oil futures, thus catalyzing a "positive feedback loop" where higher oil prices push up the overall price level, which in turn weakens the dollar, which in turn pushes up oil prices, and so on.
Second, the fact that much of the world's oil comes from politically volatile areas doesn't help. Part of the price we are paying is a political risk premium. Third, a weak dollar, while in and of itself not a bad thing, does make imports more expensive, and since we import over 60 percent of our oil, well, you get the picture.
As for the near future, the news is not good. Many are predicting the price per barrel of oil to hit $200 and the average price of gas nationwide to exceed $4 a gallon by summer.
But who would I be if I didn't leave you with a positive spin on things?
Consider how much we pay for other liquids we consume. That White Chocolate Mocha grande you order at Starbucks for $3.85 actually translates to $30.80 per gallon. And here's a sampling of gas prices in other countries: Germany - $5.88, Turkey - $7.17, South Korea - $6.25.
It is difficult however, to be flippant about the price of gas given that it has indeed had a detrimental effect on many people's lives, but one thing you (yes, you) can do to make a positive impact is actually pretty simple: If you don't like paying so much for gas, stop buying so much of it.
Stephen Zill is an economics instructor at De Anza College. He also has a pet parrot.
Needless to say, there is much more to the "dismal science" of economics than just supply and demand, but it's true that economists often come off sounding like parrots by citing those two factors to the point of trivialization. This brings us to the subject of this week's column: Just what the heck is going on with price of gasoline these days?
As far as demand goes, while there are signs that U.S. consumers are finally cutting back on gas consumption, we still suck up an enormous amount of the world'ssupply of oil (over 2 billion tons per year).
In the past, this wasn't such a big deal, but now we are competing with booming economies like China and India.
And on the supply side, there is only so much gasoline that can be refined in the short term, so yes, "supply constraints" play a role here, too. Another tricky issue is that gasoline is what economists describe as being "highly price inelastic," meaning that consumers are usually unresponsive to increases in price.
But, of course, it isn't as if we just started hogging the world's petrol, and its not like China and India just started growing economically, so why have gas prices suddenly spiked now?
There are at least three other factors at play. First, some are placing the blame squarely on the shoulders of speculators who - as a hedge against inflation, the falling dollar and further price increases - have continued to buy up oil futures, thus catalyzing a "positive feedback loop" where higher oil prices push up the overall price level, which in turn weakens the dollar, which in turn pushes up oil prices, and so on.
Second, the fact that much of the world's oil comes from politically volatile areas doesn't help. Part of the price we are paying is a political risk premium. Third, a weak dollar, while in and of itself not a bad thing, does make imports more expensive, and since we import over 60 percent of our oil, well, you get the picture.
As for the near future, the news is not good. Many are predicting the price per barrel of oil to hit $200 and the average price of gas nationwide to exceed $4 a gallon by summer.
But who would I be if I didn't leave you with a positive spin on things?
Consider how much we pay for other liquids we consume. That White Chocolate Mocha grande you order at Starbucks for $3.85 actually translates to $30.80 per gallon. And here's a sampling of gas prices in other countries: Germany - $5.88, Turkey - $7.17, South Korea - $6.25.
It is difficult however, to be flippant about the price of gas given that it has indeed had a detrimental effect on many people's lives, but one thing you (yes, you) can do to make a positive impact is actually pretty simple: If you don't like paying so much for gas, stop buying so much of it.
Stephen Zill is an economics instructor at De Anza College. He also has a pet parrot.
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