My economics gamble: A chance for gasoline glory

In the post-Katrina darkness around Sept. 15, regular gasoline was selling for $2.79 a gallon, and that was about 50 cents cheaper than the peak. Right then, I bet a gloomy friend $10 that gas prices would drop below $2 a gallon within three years.

Well, it’s getting close.

"It will never be below $2 again," my friend said two and a half months ago. "They know they can charge $3. Why should they ever drop prices?"

Waves and tides. I, of course, made my argument about business cycles. What goes up always comes down, at least a little. There are waves, and there are tides, but there always are cycles. And $2 didn’t seem so low that we couldn’t easily dip below it at least a few more times.

Then came the bet. Since then, the pricing trend has been downward. But because this guy lives in Philadelphia and works in Allentown, he won’t pay up unless or until the price drops below $2 in one of those two areas.

Near Allentown yesterday, the price was $2.04 a gallon. And now that the Thanksgiving Day weekend is over, and demand slightly slackened, there’s a chance eastern Pennsylvania will go boldly where western New Jersey has gone before. The price is $1.94 in Camden.

Smelling victory. I’ve got a small window of opportunity here. If the next cold wave hits too soon, the heating oil factor will ruin my chances this year.

But if I were you, on this bet, I’d bet on me.

Frank Warner

Comments

[Nicholas]

If the rising prices cause people to cut back on usage (and from what I've seen they have) then the sellers of the commodity will notice they're not selling as much. They'll also realize that if it's possible for them to lower the price, they'll sell more, possibly increasing their profits (or at least their revenue). They don't want to strangle their demand.

For example, say prices remain high for a while and lots of people trade in their Hummers for Honda Civics (or bicycles). They will see a long-term drop in demand (or at least, a below-normal increase). Since price normally goes up with increasing demand or decreasing supply, if they let that continue they will see a drop in volume and price. So, it's in their interest to drop prices a little and let people put off selling that Hummer...

Plus high-prices encourage research into alternatives, and we know how the "fossil fuel" people hate their being alternatives :)

That, and the temporary conditions which reduced the supply seem to be lessening in impact. But you're right, winter will increase demand regardless, allowing them to increase the price.

It's been a while since I studied economics but I think I got the gist of it right...

[Frank Warner]

I agree completely. So I have a chance to win that $10.

That would be 5 gallons!

Strangling demand would be OPEC's major concern. The price really could go sky high before we'd find a practical alternative, but before then, the world would be in a deep recession.

The oil producers remember what price gouging did to demand in 1974 and 1980. Demand plummeted, and it took years to return. For OPEC, it didn't pay off.

[George]

$1.94 in Quakertown
$1.99 in Coopersburg
http://www.allentowngasprices.com/

$1.85 in Kansas
http://www.kansasgasprices.com/

[Frank Warner]

Hmmm.... It's got to be $1.99 in Allentown or maybe Emmaus. Then I cash my chips!